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June 20, 2002
"Low-Income Housing Limited Partnerships"
Host: Invest, make money -- and get a tax credit? Sure. On this week's edition of "The Road To Riches," personal finance expert Jordan Goodman tells you how.
The volatility of the stock market has many people looking for an alternative that can provide decent, reliable returns and tax savings. There is over $4 billion invested in the housing tax credit industry, which finances the construction and rehabilitation of low-income housing and rehabilitation of historic properties. This helps alleviate the housing shortage among low- and middle-income families in America.
Congress first passed the Low-Income Housing Tax Credit program in the Tax Reform Act of 1986, and the program was made permanent in the tax bill of 1993. Money goes to each state, which awards the tax credits to real estate developers who submit market studies and proposals for affordable housing projects. The developers then sell the tax credits to syndicators who sell them to private investors. The money raised from investors finances the real estate project, which must rent at least 40 percent of the units to people whose incomes are 60 percent or less of the median income in the region. They charge subsidized rents for at least 15 years. The minimum you can invest is $5,000. Investors in the deals get dollar-for-dollar reductions in their taxes for 10 years. If you invest $10,000, you save $10,000 in taxes over 10 years -- $1,000 a year for 10 years. Credits are much better than deductions because with a deduction you only get the benefit up to your tax bracket. If you get a deduction and you're in the 30 percent tax bracket, you save 30 cents on the dollar. With a credit, you save 100 cents on the dollar spent. After the partnership liquidates in 15 years, you will get a payout from the sale of the apartment buildings, so you should come out with a profit, if all goes well.- There are some disadvantages to these tax credit deals:
- There are illiquid, so you can't get at your money if you needed it for any reason.
- They do not produce any current income, so you only get tax benefits, and an eventual payout.
- They produce extra paperwork in the form of a K-1 partnership form, though the syndicator can help you with much of the paperwork.
- There are high fees and commissions to buy into them. Total costs can be as much as 15 percent to 28 percent of the amount you invest, with 6 percent to 8 percent of that going as commissions to selling brokers or financial planners.
- If the project slips up, and falls out of compliance with IRS rules, the tax credits are recaptured, meaning you have to refile and pay back taxes and penalties.
- A few of the big ones that have been around a while include:
- Boston Capital at 800-866-2282, bostoncapital.com
- Simpson Housing Solutions, of Long Breach, Calif.
- Columbia Housing Partners, of Portland, Ore.
- National Equity Fund
- Enterprises Social Investment Corporation
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