Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
NALHFA 2011 Annual ConferenceTransformative Change inAffordable Housing
May 18-21, 2011 | Hotel Nikko San Francisco
InterestCapitalization
Presented by:
Molly M. O’Dell, CPAMay 20, 2011
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Ready?
Did you have plenty of coffee this morning?
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Tax guidance
Source Question addressed• IRC §263A – What interest is capitalized?• Reg §1.263A-12 – When do you start? – When do you stop?• Reg §1.263A-10 – How is real property defined?
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Interest is capitalizableIRC §263A
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
What to capitalize?IRC §263A
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Reg §1.263A-12 Production period
When to capitalize?
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Reg §1.263A-12
When do we start?
(e) Physical production activities
(2) Illustrations. The following is a partial list of activities any one of which constitutes a physical production activity with respect to the production of real property:
(i) Clearing, grading, or excavating of raw land;
(ii) Demolishing a building or gutting a standing building;
(iii) Engaging in the construction of infrastructure, such as roads, sewers, sidewalks, cables, and wiring;
(iv) Undertaking structural, mechanical, or electrical activities with respect to a building or other structure; or
(v) Engaging in landscaping activities.
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Reg §1.263A-12
What’s not a production activity?
(f) Activities not considered physical production. The activities described in paragraphs (f)(1) and (f)(2) of this section are not considered physical production activities:
(1) Planning and design. Soil testing, preparing architectural blueprints or models, or obtaining building permits.
(2) Incidental repairs. Physical activities of an incidental nature that may be treated as repairs under §1.162-4.
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Reg §1.263A-12 Production period
When to capitalize? (cont.)
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Jan 1 Dec 31
PIS
Expensed
Capitalized
Bldg A Bldg B
PIS
Bldg C
PIS
Jan 1 Dec 31
Expensed
Capitalized
PIS
Actual
Weighted Average
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Reg §1.263A-10 Unit of property(b) Units of real property.
(1) In general. A unit of real property includes any components of real property owned by the taxpayer or a related person that are functionally interdependent and an allocable share of any common feature owned by the taxpayer or a related person that is real property even though the common feature does not meet the functional interdependence test. When the production period begins with respect to any functionally interdependent component or any common feature of the unit of real property, the production period has begun for the entire unit of real property.
How is real property defined?
TAX
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
LET’S SEE SOME EXAMPLES!
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Loan Closing PIS Date
Bal
ance
x In
t R
ate
Capitalized Expensed
Changing balance and/or interest rate
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Loan Closing PIS Date
Bal
ance
x In
t R
ate
Capitalized Expensed
Constant Balance, fixed interest rate
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Loan Closing PIS Date
Ba
l x
In
t R
ate
Interest
Capitalized Exp
New Construction – No Bonds
• All interest incurred is capitalized since it all goes toward the construction of the project (i.e. no interest expense during the construction period)
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Bond Loan Closing
PIS Date
Ba
l x
In
t R
ate
TAX
New Construction – with Bonds
• Only interest on bond proceeds actually
used in construction will be capitalized;
remaining interest is expensed
Capitalized Exp
Expense
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Acq/RehabsAll interest incurred on funds used for
rehab expenditures is capitalizable.
Interest incurred on the acquisition
expenditure is only capitalizable to
extent it goes toward buildings out of
operation.
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Loan Closing PIS Date
Ba
l x
In
t R
ate
GAAP and Tax
Capitalized
Acq/Rehab – No Bonds
• Interest incurred on acquisition portion of debt is capitalized only
in proportion to percentage of project out of operation during
rehab period
Exp
Rehab
Acq
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Bond Loan Closing
PIS Date
Ba
l x
In
t R
ate
TAX
Acq/Rehab – with TE Bonds
• Only interest on bond proceeds actually used in rehab will be capitalized; remaining interest is expensed
• Interest incurred on Acquisition portion is expensed according to proportion of project that remains in operation during rehab period
Capitalized
Acq
Rehab
Exp
Expense
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
Had enough?
Transformative Change in Affordable HousingNALHFA 2011 Annual Conference
Molly O’Dell, CPAwww.novoco.com
NALHFA 2011 Annual ConferenceTransformative Change inAffordable Housing
May 18-21, 2011 | Hotel Nikko San Francisco
Molly M. O’Dell, CPA