Streamed: Tuesday January 25, 2022
Duration: 37 minutes
Language: English
About This Webinar
Real estate is an important part of any comprehensive financial portfolio, but when it comes to utilizing tax credits, many property owners continue to lose out.
Despite the benefits, finding and applying applicable tax credits can be difficult and overly complicated, meaning many property owners often fail to take advantage of credits they may qualify for.
To help you identify potential tax credits, this webinar will address some of the top federal and state real estate tax credits. Examples include the historic rehabilitation tax credit, multi-residential and residential credits, Opportunity Zones, TCJA and Section 179D deduction, and energy-related incentives. Our first topic in this series will be the historic rehabilitation tax credit.
Webinar Transcript
Steve Moskowitz:
Hello, and welcome ladies and gentlemen, thank you for joining us in our webinar. And we’re going to talk about a subject. It is near and dear to the hearts of Cliff, and myself, and Liz, because we’re talking about credits. This is where the government writes you a check. And first, let’s just mention the difference between a credit and a deduction. If you’re in a 30% tax bracket and you have a deduction of a hundred, you save taxes of 30. If you have a hundred of a credit, you save taxes of a hundred. So it’s much more valuable than a tax deduction. Most people know about tax deductions.
And something that I’ve come across my entire career, a lot of people will say, “Why is it that the Fortune 500 makes profits of billions of dollars, with a B, and they legally don’t pay any taxes. And here I’m much smaller than a Fortune 500, and I’m paying all these taxes?” Because the Fortune 500 has an army of guys like Cliff, and Liz, and me saying, ‘here’s all these nice, hidden treasures. Alls you have to do is know where to look.’ And what happens, here, is in the tax system, there’s two purposes to the tax law. Everybody knows about the first one; extract money from us. But the other one is in a democracy, if the government would like you to do something that’s good for the economy, they can’t order you to do it. So how they get you to do something that’s good for the economy, but they can’t order you? They give you an incentive, a tax incentive.
And here’s where we have The Historic Building Tax Credits, where the government will hand you 20% for certain buildings. And what we’re going to find out is before you just go ahead and do something, if you talk to your tax lawyer, he or she may say to you, “Well, look, there’s some things we have to do. Like that building you’re thinking of buying? I think we could get it certified as historic site. And then the government will write you a nice check.” And there’s all kinds of things. And we’re going to touch on laws like passive activity losses, and how to get around them, and credits. But basically what this is all about is to do what you want to do with a big check from the government that you can get just for the asking.
And on that happy note, I’d like to turn the floor over to my friend and colleague, Cliff Capdevielle. Cliff, take it away, please.
Cliff Capdevielle:
Thanks, Steve, that’s a nice introduction. So what Steve Moskowitz and his crew have done, for the last 35 years, is figure out ways to deliver the tax benefits that the rich get to the rest of the world. To the Fortune 5 million. The Fortune 500 have their teams of tax lawyers who are scouring the tax code full-time to look for tax incentives to help out their giant corporations. Most people don’t have that, but what Steve has done, if you’ve worked with him, I see a lot of our attendees or current clients, Steve has figured out ways to deliver tax savings through tax incentives, to small and medium sized business owners. And one of the major ways those benefits are delivered are through tax credits, and tax credits are for various activities for which the government wants to see increased investment.
Now you just got through a major employment credit period. The government stepped in nicely and created several programs to promote employment, and to encourage employers to keep their employees on payroll, through the paycheck protection program. And then the employer retention tax credit program. And they worked very well. Many jobs were saved because of those programs. In the real estate business-
Steve Moskowitz:
And so many business owners saved.
Cliff Capdevielle:
Many businesses were saved, absolutely. The business owners were able to make payroll where otherwise they, maybe, could not do that. The government has programs for real estate. So we are presenting, over the course of the next several weeks, several programs on real estate tax credits. It’s a combination of state and federal credits which, together, can be combined to create really tremendous tax savings.
Steve Moskowitz:
And that’s an important point, too. When you talk about together, we’re going to be speaking about certain credits today, but as we go on, what you’re going to find out is there’s a combination of benefits that you can have. When you put the combination together, it can be a real knockout. Thanks, Cliff. Go ahead. I just couldn’t resist because it gets me so excited.
Cliff Capdevielle:
Yeah. And we’re going to introduce that today, and then in our final program, we will bring all of these credits together. So today we’re talking about the Historic Building Tax Credit, which dates back, now, almost four decades, and is a way for the federal government and states to encourage preservation of historic buildings. And if you’ve been to Downtown Oakland or downtown San Francisco, or you’ve seen those efforts in place for the past several decades, our office in Oakland, now, is right in the heart of it. There are dozens of historic buildings that have been preserved, many of them because of these programs.
So we’re talking today about the historic tax credit. We’re also going to be talking about the New Markets Credit, the Low Income Housing Tax Credit, Solar and Alternative Energy Credits. That’s using essentially using solar panels on buildings and generating tax credits that way, and Qualified Opportunity Zones. And opportunity zones combined with these other tax credits can really produce some powerful tax savings. We’re going to put that all together as we go, but today we’re focusing on those Historic Building Tax Credits.
So we’ll start with the eligibility. Who is qualified? And this is really where Steve has been able to help clients in a way that many of your local CPAs and tax attorneys just really don’t do it. And that’s finding ways for eligible tax payers to take advantage of some of these tax credits and other tax incentives that your local CPA, probably, is not familiar with. They’re certainly not going to be experts at any of them.
Steve Moskowitz:
And Cliff, if I can just inject there, that’s the very reason that I became a tax attorney. Because when I set foot into law school on day one, I already had a bachelor’s and master’s degree in accounting. And I was already a practicing CPA doing taxes. But what I realized was, and again, I can’t speak for every CPA in the world, but so many of them, what would happen is, they basically take the numbers you have on one piece of paper and put them on another piece of paper, call the tax return, and say, “Here you go.” I didn’t want to be that person. I wanted to be the person like Cliff was talking about, say, ‘Hey, do you know about this? Do you know about this? Do you know about this?’.
And just going back to very recent history, Cliff and I were both shocked when we were doing the ERC, Employee Retention Credit, where some of our clients have gotten millions of dollars and hundreds of thousands and smaller amounts, too. We were shocked at so many CPAs didn’t know about it, didn’t touch it, didn’t care about it. Or a lot of times, told clients they weren’t eligible and, in fact, they were because that’s just not something that most CPAs like to do. And again, I can speak to that because I was a CPA, before I was a tax attorney. Whereas we, the very, very core of our tax planning is doing all these things. We go and say, “Look, there’s all these benefits around. The government has tremendous benefits.” Cliff and I can spend the rest of our careers just telling you what they are, so we have to highlight the most important ones to you. That’s what we want to talk about. That’s what we do in our careers. And that’s what we’re doing today, in this area.
Cliff, back to you.
Cliff Capdevielle:
Yeah. So let’s talk about eligibility, Steve. Who takes advantage of these credits? Well, they’re the same businesses that take advantage of every credit. These are, for the most part, the large insurance companies, the banks, major corporations. They have the teams of tax lawyers who can navigate all of this, and that’s why you see the headlines with the big companies that don’t pay any taxes. Well, this is how they do it. They, they use every bit of the tax code to their advantage. And unfortunately, a lot of smaller businesses really don’t take advantage of those tax incentives because they don’t know about them. They’re busy trying to get more work out the door. They don’t have access to the kind of tax professionals that are really going to be able to direct them to these options.
So, good news is that they are Rehabilitation Credits. Also you’ll hear Historic Preservation Credit, Historic Tax Credit; these are all the same thing. These are open for individual investors, small corporations, partnerships, and even trusts in estates. Not limited to the big companies. Not limited to the banks and insurance companies who take most advantage of those. So what does that mean? That means that you or your family or a group of investors can go buy a building and take advantage of these tax credits. You don’t have to be a gazillionaire to use these incentives.
So what does it mean to be a Qualified Rehabilitation Expenditure? So, this credit is available for expenditures on non-residential and residential real property with a class life of more than 12 and a half years. So what does that mean? That means it’s not available for land, but it is available for, what’s called, Qualified Improvement Property, which is, for the most part interior, and in some cases exterior, improvements to building. To depreciable building. So it’s not available for land, for example, but we’ll see there are a lot of expenditures, including Steve’s fee, which qualify for this credit.
An important distinction is between the enlargement of a building versus an addition, so we’ll talk about that in some detail. A building is enlarged to the extent that the total volume of a building is increased and that is available. What is not included in the definition of a qualified rehab expense, any expenditure in which the taxpayer’s not using the straight line method.
So, that requires a little explanation here. What that means is that you cannot take this credit for any expenditures that you can write off in one year. In other words, if it’s in the nature of a repair, like painting, then it’s not going to be eligible for the credit. But any kind of major improvement is typically going to be eligible for the credit, whether that’s a 39-year depreciable property, 27 and a half, or 15 year qualified [crosstalk]
Steve Moskowitz:
And a lot of times you have an option. You have more than one benefit, and one of the things that Cliff and I do is we actually give you your options. You could do A, B, or C, but C’s the best for you, and here’s why. We actually do those calculations saying, ‘here’s the advantages and disadvantages of doing each one.’
Cliff Capdevielle:
Absolutely. So this is not a cookie cutter approach. We’re going to look at every option and see what makes most sense in your situation. So, that brings up a good point. So Steve, a lot of time, real investors will say, “Cliff, this seems like a lot of work. These buildings are old, maybe there are outdated floor plans. Maybe they’ve got asbestos or other toxic issues. I don’t want to mess it around with that. I just want to tear down the property and build something new and not do any of this.” And sometimes that’s the smartest thing to do, right? Looking at all of the options, maybe starting fresh is the way to go. But it’s always a good idea to look at all of the options, including the tax effect of the various options, before you make a decision like this.
Steve Moskowitz:
And that’s one of the things you look at, too, is the different choices that you have. That’s a big deal that shouldn’t be overlooked are the choices and are they worth it? And usually they are because a lot of times people say, “Oh, I don’t want to be bother this or that.” And then Cliff says, “Well, here’s how much you’d save.” And the client says, “Where do I sign, Cliff?”
Cliff Capdevielle:
That’s exactly right. Okay. So as I mentioned, there are some exclusions and so some of those that you’re not going to include are parking lot. So if you’re thinking about a parking lot, then the Historic Credit is not the best option. Sidewalks, landscaping, generally, are not going to fall-
Steve Moskowitz:
Doesn’t mean there aren’t other options that we’ll discuss separately, but not for this one.
Cliff Capdevielle:
Absolutely. So, that’s going to be the … The requirements to claim the credit, to Steve’s point, are that the building has to be substantially rehabilitated, and we’ll talk about that in a little detail, and the building has been certified as a historic structure. Typically, that’s going to be a combination of the State Office of Historic Preservation and the National Park Service registration with the…
Steve Moskowitz:
I’d like to touch on that for just a second because a lot of people say, “Well, okay, I’ll take a look at the list, see what’s available, and if anything interests me.” But one of the other points is that sometimes you can look at some building and say, “You know what? You can get this one certified.” And Cliff had a client like that, and it made a tremendous difference. So it’s great if you say that there’s an existing one, but if there’s some other building you at least want to look, can I get this one qualified? And if you can, the tax savings, to use the fancy legal term, will be, or can be, beaucoup.
Cliff Capdevielle:
Yeah. And then the last major requirement is that building has to be depreciable, which means it has to have some business purpose. It’s either going to be used in an operating business, like a restaurant, or it’s a residential structure, like an apartment building, that’s eligible for depreciation.
And when is it considered substantially rehabilitated? And that’s really a pretty simple test. The basic rule of thumb is that you need to invest the equivalent of the current adjusted basis in it. The building. So if the take a simple example, let’s say it’s the building plus land is 2 million dollars basis. The building, it constitutes half of that. It’s a million dollars adjusted basis in the building. Then you would need to invest, roughly, a million dollars into the rehab in order to qualify for this credit.
There’s a measurement period. And if it’s a single phase rehab, that’s typically going to be two years, 24 months. This is not calendar year. This is going to be from the start of the project to the end is the measuring period. Or $5,000. So obviously if you’re only investing $5,000, this is probably not the best tax opportunity for you. But typically, that’s what will qualify is if you invest new money, equal went to roughly the existing basis in the building.
Steve Moskowitz:
And another thing with this, until you become really familiar with it, don’t fixate on anything because what you’re going to see is you saw our slide 24 month period. You see a later slide where there’s an exception with a 60 month period. There’s just so much here. That’s why we’re just so excited to present it to you. Because there’s just so many tax savings. Much like the Bible, ask and you shall receive. That’s what you have with these things.
Cliff Capdevielle:
Yeah, absolutely. Or if it’s a multi-phase project, as we’ll talk about, you can have up to 60 months to complete the project. So what is a certified rehabilitation, as I mentioned? That’s going to be with regard to a property that’s been certified by the National Park Service as a historic structure, and that information is then passed on to the IRS. Which, of course, this is a program that’s jointly administered by the Department Interior, National Park Service and Department Treasury.
So what do you do? Just briefly, we’re not going to get into the weeds on the request for certification, but it is a form that’s submitted with the National Park Service, and then the park service will approve that and determine if the rehabilitation meets the Secretary of the Interior’s standards for that rehab project.
Steve Moskowitz:
And sometimes we want to bring in an expert to help the government understand why this structure qualifies. It’s not just filling out a cold form. This is really putting your skill into the effort.
Cliff Capdevielle:
Exactly. And back to the basics, as I mentioned, what you need to do to qualify for the credit is to invest at least your adjusted basis on top of what you can get invested so far. So the example that I used prior, if your adjusted basis is a million, you’re going to need a million of new money in order to qualify for the credit.
So how do you claim the credit? This is where Steve can help you. The credit is claimed on your tax return. As I said, for those years during which the rehab is taking place and up to five years. So in other words, in general, the amount of the credit is 20% of the qualified rehabilitation with respect to that building.
And then again, as I said, the credit is first claimed in that year in which the building is placed in service. So for example, if you’ve got a two year project that starts, let’s say midyear 2022, and is completed mid year 2024, then the first eligible year would be 2024. The year that it’s in service.
Steve Moskowitz:
And even those things we can talk to you about because you can have something that’s partially in service. You could think of a 10 story building where seven floors are in service, and three are not.
And another thing is planning. We help you with the planning because later on in our presentation, you’re going to see, well, what happens if you sell the building? There’s a very short period that you’re going to have to hold onto it if you don’t have to give this back. And we plan all that in, because a lot of times people are in real estate for flipping. We say, “Okay, we can do that. And if you flip it at this period, you have this benefit. If you flip it at this benefit, you have this ben…” And that’s all part of what we do. Not just here you go, but what do you want to do and make the tax laws work for what you want to do, which could be very different than what your twin sibling wants to do.
Cliff Capdevielle:
Yeah, that’s exactly right, Steve. So you do need to hold the building for at least five years in order to take full value and get the entire credit. But if you do sell the building at any time within those first five years, then your credit will be prorated. And as Steve mentioned earlier, there’s also the option for a phased rehab project. And these are for larger projects, typically. There’s going to be a five year, 60 month, measuring period for the larger projects. You still qualify if you complete within the phased rehabilitation plan.
Steve Moskowitz:
And what tax planning is all about. It’s wonderful and it’s great that this is your only project, but sometimes people say, “Well, you know, Cliff, I have this project, and I have a business, and I have this, and I have this.” Well you put them all together and we say timing. Timing is, can be, very important in tax. In what year do I place this in service and take the benefit? And oh, can I have a carryback? Can I have a carry forward? Because we’re not only looking to save you money on this building, we’re looking to save you money on all your taxes. We’re putting it all together. That’s why the planning is so very important. Not just planning for this, but planning overall and how they can [inaudible 00:26:08].
Cliff Capdevielle:
Exactly, yeah. And as I mentioned earlier, there’s this Placed in Service requirements. So this is really about getting buildings back into commerce. In other words, these are buildings, for the most part, if you’ve been in downtown Oakland or San Francisco, see a lot of these buildings have been abandoned for many years, and so the idea is to bring these buildings back into service so that there is this Placed in Service requirement. And that’s when the building is ready to go. Ready doesn’t mean that it’s actually occupied, as if you’ve been to downtown Oakland, you know that what was supposed to be the Twitter Building and other major rehab projects, have been stalled out. But I guarantee you that a lot of these credits were claimed. Even if the buildings are not fully occupied or even partially occupied.
Just a few accounting issues we want to talk about. As I mentioned earlier, the credit requires that you use a straight line depreciation. So what’s interesting, here, is that there is, essentially, double dipping. So you are … A lot of credits, if you work with us before, you’ll you see a lot of credits. Really, you’re not allowed to double dip. In other words, if you’re taking an expense, you’re not also allowed a credit for the same dollars. That’s not true with the Historic Credit. You are allowed to use straight line depreciation. It’s going to be 15 years for qualified improvement property, 27 and a half years for residential construction, and 39 years for non-residential. So you do need to use one of those methods on the depreciation side, but you’re also allowed a tax credit for that investment.
So a little bit about recapture. We’re running out of time, so we’re going to move quickly through these last slides. Recapture, as I said, if you don’t use the property, if you sell it before the five year period, you do have the recapture, the credit, to the extent that the property is converted to a non-commercial use.
So let’s say you buy a building, you intend to use it as a rental property, somewhere along the line, you decide you want to move into it. That’s not no problem, but you do have, you will have to recapture the credit. You will be limited in terms of available credit.
Steve Moskowitz:
Hey, Cliff, because we are running out of time, there’s something I think that’s real important for our viewers to know. A lot of people say, “Well passive activity” … That’s exactly what … you read my mind, Cliff. You worked with it so much, you read my mind. And what happens is a lot of people say, “Well, my accountant told me that real estate’s a passive activity, and if I have a loss, it just sits there. And I can’t offset it against my business profit or other things. Dividends, interest, et cetera.” There’s an exception to that; Internal Revenue Code Section 469, which, if you qualify as real estate professional, you can offset it.
So again, there’s a lot of technicalities here, and we’re happy to go over those with you, give you copies of things. But what I want to point out is we can also, if you otherwise qualify, bring you in under the exception to the passive activities’ loss rules, not be limited to your passive income, and offset set your other income. Wages, dividends, interest, profit from a business, if you or your spouse otherwise qualify. That applies to this, too, and there’s some very generous rules in here. So you want to know that because when someone gives you something nice, that’s great, but here they’re giving you extra nice. And there’s a way around a limitation that a lot of the accountants don’t tell you about, and this is beautiful because you can use it to offset other income besides the building.
Cliff Capdevielle:
Yeah, that’s really important, Steve, and this is why it’s so valuable to talk to a tax attorney before you jump into any new investment, because you may be leaving money on the table if you don’t consider things like that. For example, many of our clients are operating non-real estate businesses. So how do they get around these passive activity rules and the real? They use the real estate professional rules. So they have one spouse who’s fully dedicated, full-time, to real estate activities. Got to be… You have to spend at least 750 hours during the year on the real estate activities. And in many cases, that works for a couple. You have one of the spouses is a dentist, and the other one is operating the rental properties, it works out beautifully, and you’re able to offset those losses that are generated in real estate against the active activity of the other business.
Steve Moskowitz:
And a lot of times what we’ll do is we’ll have a situation where you have one spouse working outside the home, and the other spouse being house spouse, and you say, “You know, house spouse, if you would manage the real property, and 750 hours a year is really not a lot, you could have this huge tax savings.” That is a very great incentive for people to go forward and say, “Yeah, I’m happy to go ahead and manage that.” And then we show you the rules, what qualifies.
Cliff Capdevielle:
Right. Short term rentals qualify. So a lot of people are buying, flipping properties, or they want to buy it an old building, fix it up, and use it on Airbnb. Well, that’s going to qualify. And if you keep that property for five years, you’re going to get the full value of that credit. And when you sell the property, you’re going to be entitled to long term capital gains, which we hope stays at 20%. But you certainly, short term rentals, Airbnb-type properties, will qualify.
Vacation home. So like I said, as long as the primary purpose is business, it will qualify. And that holds true for vacation properties, as well.
Well, a lot of people say, “Steve, this sounds very interesting, but I’m not really ready to buy an old building and deal with asbestos and contractors and all that. Can I invest in this kind of thing and still get, take advantage of, these credits?” And the answer is absolutely yes. You can’t buy or sell the credits directly, but through forming partnerships, you can absolutely take advantage of some of this, and as an investor, you will be entitled to those credits.
So you don’t have to be out there with the hammer at all. Then that’s what discourages a lot of people. You can invest in these properties, and as long as they’re being actively run as businesses, you can absolutely take advantage of these credits.
Steve Moskowitz:
And the law here is very generous to the taxpayers, and that’s just a fantastic way to have the best of all worlds. Where you’re not swinging the hammer, but you’re getting the benefits as if you were.
Cliff Capdevielle:
Thanks, Steve.
Liz Prehn:
We have a couple of questions.
Cliff Capdevielle:
Yeah.
Liz Prehn:
Sorry, just before we wrap up.
Cliff Capdevielle:
Go ahead, Liz.
Liz Prehn:
One is who can provide the adjusted basis calculations, and how does that work in providing that to the authorities as backup?
Steve Moskowitz:
Whoever prepares your tax returns can do that. All the adjusted basis is, is just your original cost, plus and minus some things. Like plus your improvements, minus your depreciation, and you come up with adjusted basis. And adjusted basis is important for a lot of calculations, including figuring what your profit is. So for example, if we’re doing that, we would have that on hand.
Liz Prehn:
Great. And then maybe just go over the benefits of long term capital gains in this context.
Steve Moskowitz:
Well, at the crudest level, you pay less taxes because what happens is the government has a preferential rate, which is less, way less, than the ordinary income rates. So by holding the property for just a little bit of time, you wind up paying much less in taxes. A difference between long term capital gains and short term capital gains.
Liz Prehn:
Great. And if anybody has any additional questions or something comes up, you’re going to receive a copy of this recording and feel free to email us or give us a call or visit our website at Moskowitzllp.com.
Steve Moskowitz:
Thanks Liz.
Liz Prehn:
Mm-hmm. Okay, well thank you, everyone. Thank you, Steve and Cliff.
Steve Moskowitz:
Always a pleasure. We love talking about taxes and showing people that I can save all kinds of money at the expense of Uncle Sam.
Cliff Capdevielle:
Thanks, Liz. Thanks, Steven. And for our audience, absolutely send us any questions that you have in an email. You should have access to my email, Steve’s email. Let us know what questions you have and let us know if you’d like to discuss this or any other tax saving ideas.
Steve Moskowitz:
Thanks to everyone. And we look forward to seeing you next time.
Liz Prehn:
Thank you.