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Guide for Completing Form 8823 - page 187 / 197

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Exhibit 24-1 Explanation of Credit Recapture Requirements Under IRC §42(j)

As explained in the legislative history, the disposition of an LIHC building (or interest therein) is a recapture event. 1 The amount of the recapture is 1/3 of the allowable credit for each year if the building is disposed of through year 11 of the compliance period plus interest. The interest is computed at the overpayment rate established under IRC §6621on the recaptured credit for each taxable year for the period beginning on the due date for filing the return for the prior taxable year involved. The amount of the recapture declines if the disposition occurs after year 11 of the credit period.

Taxpayers must file Form 8611, Recapture of Low-Income Housing Credit, with their tax return for the year of sale to recapture the LIHC.

Large Partnership Recapture

In the case of a large partnership (a partnership of 35 or more partners), the partnership is treated as the taxpayer to which the credit is allowable for purposes of recapture. The tax benefit rule under IRC §42(j)(4)(A) does not apply and the increase in tax because of the recapture amount is allocated among the partners in the same manner as the partnership’s taxable income for the year is allocated among the partners.

The legislative history2also indicates that no change in ownership is deemed to occur on the disposition of a partner’s interest provided that within a 12-month period at least 50 percent (in value) of the original ownership is unchanged. These conditions apply unless the partnership elects out of *large partnership treatment* under IRC §42(j)(5).

Other Partnerships and Recapture

For partnerships with fewer than 35 partners, and those electing out of the large partnership provisions of IRC §42(j)(5), a partner (taxpayer) may elect to avoid or defer recapture until the taxpayer has, in the aggregate, disposed of more than 33 1/3 percent of the taxpayer’s greatest total interest in the qualified low-income building through the partnership at any time.

Once dispositions aggregate more than 33 1/3 percent, further deferral is possible *for dispositions on or before July 30, 2008,* only if a surety bond or alternative collateral was provided. The taxpayer that defers recapture by reason of the 33 1/3 percent rule will remain subject to recapture with respect to that interest. See Rev. Rul. 90-60, 1990-2 C.B. 35. *For dispositions after July 30, 2008, the taxpayer is not subject to the recapture requirement if it is reasonably expected that the building will continue to be operated as a qualified low-income buildings for the remaining compliance period.*

*Posting Surety Bonds Upon Disposition*

*For dispositions on or before July 30, 2008, recapturing the accelerated portion of the credit could be avoided if it was reasonably expected that the building would continue to be operated as a qualified low-income building for the remaining compliance period and* the owner selling the building, or interest therein, *timely posted* a bond equal to

1 2

H . R . C o n f . R e p . N o . 4 8 1 , 9 9 t h C o n g . , 2 H . R . C o n f . R e p . N o . 4 8 1 , 9 9 t h C o n g . , 2

nd nd

Sess. II-96 (1986) Sess. II-96 (1986)

24-4

Revised October 2009

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