A Not-So-Casual Look at Casualty Loss - Part 2
Part 1: Definition of casualty loss and where we find IRS guidance
Part 2: Casualty loss related to a presidentially declared major disaster
Part 3: Casualty losses that do not relate to a declared disaster
Part 4: IRS provisions designed to assist victims of major disasters
When disasters warranting assistance from the federal government occur, the Robert T. Stafford Disaster Relief and Emergency Assistance Act gives the President authority to issue a major disaster declaration for affected areas. Following the declaration, the Federal Emergency Management Agency (FEMA) may designate specific cities, counties, or other local jurisdictions as eligible for assistance. Such designations are published by FEMA via the Federal Register.
"What happens to our credits until the loss is restored? Is there also recapture?" Assume that a building’s qualified basis is restored within a reasonable period. If a building that is in a FEMA major disaster area suffers a reduction in qualified basis because of the disaster, the building will not be subject to tax credit recapture and may continue to claim credits during the restoration period. What constitutes a reasonable period is determined by the state tax credit agency that monitors the building. However, the period may not extend beyond the end of the 25th month following the close of the month of the major disaster declaration. It is important to note that Revenue Procedure 2014-49 changed the allowable period from what had been included in earlier technical guidance and differs from the time frame for other casualty losses, which is 24 months from the end of the calendar year in which the casualty occurred. Therefore, the declared disaster has a more restrictive maximum deadline.
Question: What qualified basis will I use to calculate the credits while the building is down?
Answer: When calculating the allowable credits during the reasonable restoration period, the building’s qualified basis at the end of the taxable year immediately preceding the first day of the major disaster incidence period (a date determined by FEMA) should be used.
Question: We got a carryover allocation of credits toward the end of last year, but a declared disaster hurricane just destroyed what we had built of the buildings. Is there any way to get more time to finish the buildings?
Answer: Once a project receives a carryover allocation, there are two deadlines that owners must meet to continue to hold the right to claim credits. At least 10% of the reasonably expected costs must be spent within no more than 12 months of the carryover (the 10% test). Once that is accomplished, the building must be placed in service no later than the end of the second year following the allocation. In cases of declared disasters, the deadline to meet the 10% test is extended by 6 months for damaged properties. The deadline to place in service is extended one year to December 31 of the year after the usual two-year deadline.
Question: My project was in lease-up and we intended to claim credits this year. Then a major declared disaster wildfire destroyed the buildings. What happens to the tax credits?
Answer: The state agency has the discretion to treat the allocation as a returned credit. If, however, they opt to allow the allocation to continue with the destroyed property, they may pause or “toll” the deadline for the beginning of the first year of the credit period. The tolling period must not extend beyond the end of the 25th month following the close of the month of the Major Disaster declaration. Owners may not claim any low-income housing credit during the restoration period of these first-year buildings.
Question: Will an 8823 be filed for my damaged building before it is restored when a declared major disaster is involved?
Answer: Probably not. Official guidance suggests that an 8823 resulting from major disaster casualty may not have to be submitted if the rebuild is within the state-allowed reasonable period. This is because there is no reduction in qualified basis.
NOTE: the next article will discuss a contrasting situation when a major disaster is not involved.
Casualty Loss in a Declared Disaster
A disaster is declared for an area in March of 2018. A building is seriously damaged in the disaster. The latest the building can be restored and avoid disallowance of credits and recapture is 25 months later, or April of 2020. The qualified basis that was applicable prior to the declaration of disaster will be used when calculating the allowable credit.
Next week: Am I out of luck for my tax credits if my disaster is not a major one? And more!