Article | What the IRS Says About Police Substations

Questions Posed...

An LIHTC building is located in a qualified census tract as defined by tax code. [§42(d)(5)(C))] The neighborhood in which the building is located is an area with a high rate of crime. The local police department leases a unit in the building to be used as a police substation. The substation is part of the police department's community outreach program and is intended to serve as a deterrent to crime in the community, assist the community with solving crime-related problems, reduce the response time to area calls for service, and provide the locally assigned police officers with a local office. The services provided by the police are free of charge. The adjusted basis of the property constituting the substation does not exceed 10 percent of the eligible basis
of the building. As required by §42, before the allocation of low-income housing credits to the building, a comprehensive market study was conducted to assess the housing needs of the low-income individuals in the area to be served by the building. [§42(m)(1)(A)(iii)] The study found, among other items, that due to the high
rate of crime in the community in which the building is located, providing a police substation would be appropriate and helpful to individuals in the area of the building whose income is 60 percent or less of AMGI. As the project neared completion, the owner had the following questions. 

1. May the cost of the substation be included in the building's eligible basis?
2. Is the substation included in the building's applicable fraction?

...and the IRS says...

1. The cost of the substation may be included in the building's eligible basis. The substation qualifies as a community service facility under §42. [§42(d)(4)(C)(iii)]. Under the facts presented, the substation is designed to serve primarily individuals whose income is 60 percent or less of AMGI for
   the following reasons: (1) the services provided at the substation facility are services that will help improve the quality of life for community residents; (2) the market study required to be conducted under §42 found that the services provided at the substation facility would be appropriate and helpful to individuals in the area of the building whose income is 60 percent or less of AMGI [§42(m)(1)(A)(iii)]; (3) the substation facility is located within the building; and (4) the services provided at the substation facility are affordable to individuals whose income is 60 percent or less of AMGI. Because the other LIHTC allocation requirements are met [§42(d)(4)(C)], the adjusted basis of the building will be determined by taking into account the adjusted basis of the substation facility. Thus, the adjusted basis of the substation facility is includable in the building's eligible basis.

2.  The unit is not included in the building's applicable fraction. The substation facility is not a residential rental unit for purposes of §42. Therefore, the substation is not includable in either the numerator or denominator of the building's applicable fraction.  

Up next: Are LIHTC allocation application fees included in eligible basis?

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