How to Invest in Tax Credits
Tax credits are relief incentives that provide state tax shelters for high-tax-bracket individuals and corporations in exchange for investments in certain programs. Tax credits are allocated annually to the states from the federal government. The states, in turn, distribute the credits for development projects for the public good, such as low-income housing tax credits (LIHTCs). These LIHTCs may also be sold or traded for equity, according to applicable laws.
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Things You'll Need
- Knowledge of the options for alleviating your state tax liability
- Expert investment consultant
Instructions
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Invest in Tax Credits as a Developer
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Acquire tax credits to sell or trade with real estate investors. Submit a development plan to the Housing Finance Agency in your state to bid for the tax credits.
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Seek investors who will fund the development project in exchange for the tax credits, which will mature after the project is finished.
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Comply with federal regulations during development and during the subsequent exchange of tax credits, to avoid penalties.
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Recoup your dividends during the development phase and relinquish your tax credits during the April tax season following completion of the project.
Purchase or Trade for Tax Credits
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Purchase tax credits as a third-party investor from financial institutions, public utilities or other entities that are divesting from their tax credit investments.
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Purchase tax credits from the original developer after the LIHTC-approved project is complete.
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Invest in an LIHTC real-estate development through a limited-partnership agreement. An investor gains a vast majority of the developing company (and commensurate tax credits), and the original credit holder retains limited rights that allow for the work to be done and a margin of profit to be made.
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Tips & Warnings
Your company can invest in public housing tax credits to fulfill an aspect of a mission statement.
You can invest in tax credits to fulfill federal requirements under the Community Reinvestment Act.
Developers can acquire more tax credits by proposing housing projects that reach larger or more underserved populations, especially those in outlying areas.
Many publicly held corporations that generate substantial income invest in tax credits not to increase income but to reduce tax obligations.
Tax credit allocation, distribution and redemption form a complex system that is designed to work over the long term. Don't expect to see immediate tax relief.
The rate of credit varies by project and investor, so no two tax credit investments are alike. This complex transaction will require expert attention.
