Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA NALHFA 2011 Annual Conference Transformative.

Transformative Change in Affordable HousingNALHFA 2011 Annual Conference

Molly O’Dell, CPAwww.novoco.com

NALHFA 2011 Annual ConferenceTransformative Change inAffordable Housing

May 18-21, 2011 | Hotel Nikko San Francisco

InterestCapitalization

Presented by:

Molly M. O’Dell, CPAMay 20, 2011



Ready?

Did you have plenty of coffee this morning?



Tax guidance

Source Question addressed• IRC §263A – What interest is capitalized?• Reg §1.263A-12 – When do you start? – When do you stop?• Reg §1.263A-10 – How is real property defined?



Interest is capitalizableIRC §263A



What to capitalize?IRC §263A



Reg §1.263A-12 Production period

When to capitalize?



Reg §1.263A-12

When do we start?

(e) Physical production activities

(2) Illustrations. The following is a partial list of activities any one of which constitutes a physical production activity with respect to the production of real property:

(i) Clearing, grading, or excavating of raw land;

(ii) Demolishing a building or gutting a standing building;

(iii) Engaging in the construction of infrastructure, such as roads, sewers, sidewalks, cables, and wiring;

(iv) Undertaking structural, mechanical, or electrical activities with respect to a building or other structure; or

(v) Engaging in landscaping activities.



Reg §1.263A-12

What’s not a production activity?

(f) Activities not considered physical production. The activities described in paragraphs (f)(1) and (f)(2) of this section are not considered physical production activities:

(1) Planning and design. Soil testing, preparing architectural blueprints or models, or obtaining building permits.

(2) Incidental repairs. Physical activities of an incidental nature that may be treated as repairs under §1.162-4.



Reg §1.263A-12 Production period

When to capitalize? (cont.)



Jan 1 Dec 31

PIS

Expensed

Capitalized

Bldg A Bldg B

PIS

Bldg C

PIS

Jan 1 Dec 31

Expensed

Capitalized

PIS

Actual

Weighted Average



Reg §1.263A-10 Unit of property(b) Units of real property.

(1) In general. A unit of real property includes any components of real property owned by the taxpayer or a related person that are functionally interdependent and an allocable share of any common feature owned by the taxpayer or a related person that is real property even though the common feature does not meet the functional interdependence test. When the production period begins with respect to any functionally interdependent component or any common feature of the unit of real property, the production period has begun for the entire unit of real property.

How is real property defined?

TAX



LET’S SEE SOME EXAMPLES!



Loan Closing PIS Date

Bal

ance

x In

t R

ate

Capitalized Expensed

Changing balance and/or interest rate




Bal

ance

x In

t R

ate

Capitalized Expensed

Constant Balance, fixed interest rate




Ba

l x

In

t R

ate

Interest

Capitalized Exp

New Construction – No Bonds

• All interest incurred is capitalized since it all goes toward the construction of the project (i.e. no interest expense during the construction period)



Bond Loan Closing

PIS Date

Ba

l x

In

t R

ate

TAX

New Construction – with Bonds

• Only interest on bond proceeds actually

used in construction will be capitalized;

remaining interest is expensed

Capitalized Exp

Expense



Acq/RehabsAll interest incurred on funds used for

rehab expenditures is capitalizable.

Interest incurred on the acquisition

expenditure is only capitalizable to

extent it goes toward buildings out of

operation.




Ba

l x

In

t R

ate

GAAP and Tax

Capitalized

Acq/Rehab – No Bonds

• Interest incurred on acquisition portion of debt is capitalized only

in proportion to percentage of project out of operation during

rehab period

Exp

Rehab

Acq



Bond Loan Closing

PIS Date

Ba

l x

In

t R

ate

TAX

Acq/Rehab – with TE Bonds

• Only interest on bond proceeds actually used in rehab will be capitalized; remaining interest is expensed

• Interest incurred on Acquisition portion is expensed according to proportion of project that remains in operation during rehab period

Capitalized

Acq

Rehab

Exp

Expense



Had enough?



NALHFA 2011 Annual ConferenceTransformative Change inAffordable Housing

May 18-21, 2011 | Hotel Nikko San Francisco

Molly M. O’Dell, CPA

[email protected]

Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA NALHFA 2011 Annual Conference Transformative.

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