reduced in the year the grant is made for the building and all subsequent years in the compliance period. A building is out of compliance as of the date the federal grant is made if the Eligible Basis is not reduced *and the reduction would have resulted in a decrease in qualified basis.
Example 1: Grant Used to Replace Property Included in Eligible Basis
An owner constructed an LIHC building that was placed in service on September 1, 2003, and 2003 is the first year of the credit period. The owner included the cost of kitchen appliances installed in the low-income units’ kitchens; i.e., the dishwashers, refrigerators, and stoves.
During 2010, the owner replaces the worn out appliances using funds received from a federally sourced grant. The eligible basis must be reduced for the amount of grant used to purchase and install the new appliances.*
Eligible Basis is not reduced if the proceeds of a federal grant are used as a rental assistance payment under section 8 of the United States Housing Act of 1937, *a qualifying program3 of rental assistance administered under section 9 of the Unit State Housing Act of 1937 or any comparable rental assistance program as designated by the IRS.4*
Under Rev. Rul. 2002-65, rental assistance payments made to a building owner on behalf or in respect of a tenant under the Rent Supplement Payment program (12 U.S.C. §1701s) or the Rental Assistance Payments program (12 U.S.C. §1715z- 1(f)(2)) are not grants made with respect to a building or its operation under IRC §42(d)(5). Thus, proceeds from these programs do not require a reduction of Eligible Basis.
*Buildings Placed in Service On or Before July 30, 2008
If, during any taxable year of the 15-year compliance period of a low-income building placed in service on or before July 30, 2008, a grant is made with respect to any building or the operation thereof, and any portion of such grant is funded with Federal funds (whether or not includible in gross income), the eligible basis of such building and all succeeding taxable years shall be reduced by the portion of such grant that is so funded.
Example 2: Federally-Funded Grant Used to Operate LIHC Building
An owner constructed an LIHC building that was placed in service on September 1, 1998, and 1998 is the first year of the credit period. On June 25, 2009, the owner receives a grant funded with Federal funds to buy computers that will be used by the office staff to operate the LIHC building.
*See Treas. Reg. §1.42-16(c) for definition of qualifying residential assistance program.* *Treas. Reg. §1.42-16.*
Revised October 2009