IRS Issues Instructions on How to Retire LIHTC Recapture Bonds

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New Internal Revenue Service Revenue Procedure 2008-60 provides guidance on how investors can make an election to retire an existing recapture bond they’ve posted under the low-income housing tax credit (LIHTC) program.

The guidance pertains to an amendment to the LIHTC program made by the new Housing and Economic Recovery Act of 2008. This amendment repealed the prior requirement that an owner, at the time of sale or disposition of a low-income building (or interest in one) during the 15-year compliance period, post a surety bond (“recapture” bond), or alternatively set up a “TDA” account and pledge U.S. Treasuries, in order to avoid or defer the recapture of tax credits. In place of the bond requirement, the law extended the statute of limitations for the IRS to assess a taxpayer for recapture tax liability caused by a reduction in a building’s eligible basis, to three years after the date on which the IRS is notified of such a reduction. The amendment was effective for dispositions after 7/30/08 – the law’s date of enactment.

The amendment also permits taxpayers that had already posted a surety bond or established a TDA, for dispositions before 7/31/08, to make an election to apply the new rules to their disposition (i.e. to no longer to have to post a bond).

To make this election, says Rev. Proc. 2008-60, the taxpayer must submit a letter to the IRS containing the following information:

  • The taxpayer’s name, address, and taxpayer identification number;
  • A statement affirming that the taxpayer reasonably expects that the building will continue to be operated as a qualified low-income building (within the meaning of ¤42) for the remainder of the building’s compliance period; and,
  • A declaration stating: “Under penalties of perjury, I declare that I have examined this letter and the representations made therein, and to the best of my knowledge and belief, they are true, correct, and complete.”

The taxpayer must attach to the letter a copy of the signature page from IRS Form 8693 (“Low Income Housing Credit Disposition Bond”) for the building, as approved by and received from the IRS, and mail both items to the IRS at a specified address in Pennsylvania. According to the IRS, once the election is made the taxpayer will be treated as if no surety bond or TDA had been established for that disposition.

The new guidance should enable investors who’ve already posted a recapture bond and who pay annual insurance premiums for the bond to retire the bond and discontinue paying premiums. For investors who’ve posted bonds but fully paid their premiums for the entire 15-year compliance period, the impact is less clear as to whether they may be able to retire the bond and get a partial refund of their premium payment.

Rev. Proc. 2008-60 applies to taxpayers that disposed of a low-income building (or interest in one) before 7/31/08, for which the IRS approved a Form 8693. The IRS said it doesn’t apply to taxpayers who (1) set up a TDA and received a Form 8693 approved by the IRS before 1/1/08, but (2) didn’t fund the TDA within the prescribed time period.

(Rev. Proc. 2008-60: http://www. irs.gov/pub/irs-drop/rp-08-60.pdf)