Are Limited Partners in Apartment Investments Making Costly Tax Mistakes?

Whether an apartments tax benefits offset the property tax or merely the income tax makes a huge difference.

I have seen general partners present LIHTC deals with a claim that they are tax exempt. No further explanation was given. The "Tax Exemption" was one of their main selling points in getting investors.

It's important to know the difference because if an investor thinks that there are is no property tax expense, that alone could make them invest in the deal. Property taxes are often the biggest operating expense on a property. Eliminating that expense drastically lowers risk along with increasing cash flow.

Items that could offset property taxes:

• New development in opportunity zones

• Heavy value add where the renovation cost equals the purchase price - the land cost

• Historic building renovations

Items that give income tax benefits:

• LIHTC and government rental assistant programs - Low Income Housing Tax Credit

• LURA - Land Use Restriction Agreements

  • AMI - Area Median Income. The items above often only let tenants rent the property if they make a percentage of the area median income. 60% is an example.

• Bonus Depreciation - renovation costs used as a tax reduction

• Accelerated Depreciation - offsetting qualifying items on the property in the first year of ownership at a faster rate than straight line depreciation