Frequently Asked Questions

  • Who is eligible to participate? - It’s best to let one of our analyst determine eligibility as there’s typically an avenue for everyone to participate, but our target individuals are those with high adjusted gross income who receive passive losses through rental real estate.

  • What is a Negative Capital Account? - Each year that the partners incurred a loss from their partnership interests, their capital account was reduced by the amount of the loss. Once these losses have exceeded the partner’s initial capital, they start to build a negative capital account.

       For example: If your initial capital account was $50,000 and you received a K-1 showing a loss of $56,000, then your capital account at the end           of the year would be -$6,000. Each year you receive a K-1 showing a loss, the negative capital account will get larger.

      Most of these losses are created through depreciation deductions. The faster you are able to depreciate a property, the larger the negative                capital account will grow.

  • Does gifting the project to a charity relieve me of the tax burden? - Although there are some people who claim this can be done, the answer is No! There is no way to set aside your capital account in a gift or transfer to a charity and any change of ownership will trigger its recapture.

  • Will we have taxes on the sale or transfer of an older project? - That depends on the financial circumstances of the transactions. This could range from capital gains, ordinary income or return of capital depending on the investor’s capital account and any recapture event. Our Project Analysis Service can help determine the tax issues of these transactions.

  • What are Borrowed Deductions? - The Internal Revenue Code allows people to depreciate buildings and equipment but not land. The time frame under which the property can be depreciated varies depending on the applicable rules. For example: If a project value is $100,000 and the Tax Code allows you to depreciate it over 20 years, then your annual depreciation deduction would be $5,000.

      Now, if the project was sold in year 10 for $100,000, your basis would be $50,000 and you would owe tax on $50,000. The exact tax treatment            would depend on whether you were able to accelerate the depreciation and the circumstances of the sale.

  • What is Phantom Income? - Phantom Income is a term we use to describe taxable income without corresponding deductions. This would include: the principal portion of the mortgage, amounts paid into reserve accounts and interest earned on the reserve accounts. The largest component is the principal portion of the mortgage.

      Phantom Income occurs throughout the life of the project. It is more than offset by depreciation deductions, which is why these projects                    produce substantial losses in the early years. During these early years, Phantom Income tends to go unnoticed; however, when the                              depreciation runs out it is very apparent. Since the principal portion of the mortgage gets larger as the project ages, so does the Phantom                  Income.

  • Will participating in the Special Allocation Strategy lock me in? - No. You retain all your current and future rights in the partnership. The partners can change the allocations at any time and the strategy can be terminated at any time. DLH will participate as a non-equity special allocation partner as long as the equity partners feel it is worthwhile to them.

  • Can any charity be used as a participant in the Special Allocation Strategy? - No. The charity must be in the specific business of providing for the housing needs of its low-income benefactors. Otherwise, it may be exposed to UBTI or worse, the loss of its tax-exempt status.​

  • What are Passive loss deductions? - Income from rental real estate is generally considered a passive activity. Losses are mostly due to the situation where the property is depreciated significantly faster than the payment on the mortgage, which creates a net loss or paper loss. These net losses are taken by the investors in the early years. However, these accelerated losses are Followed by Phantom Income.

  • Does Housing & Tax Consultants, LLC have a tax ruling from the IRS? - The tax strategies marketed by H&TC are in compliance with the Tax Code; therefore, no rulings are necessary. However, the IRS has audited and issued revenue rulings regarding the major parts of our strategies in 1975 and 1981. No changes have been made to them since then.

      H&TC has tax opinions from leading tax attorneys stating our compliance and the viability of our strategies utilizing well-established areas of              the tax Code, although some of them may be unfamiliar to your tax advisors. To assist your advisors in their due diligence, we will provide them        with the relevant tax law and our research to properly review our proposed strategy(s).

  • What is UBTI? - UBTI stands for Unrelated Business Taxable Income. If the source of income in a non-profit organization is from sources of business that are unrelated to the mission of the non-profit, then it may be taxable to the non-profit or may result in the non-profit organization losing its tax exempt status.

  • What is a Limited Disbursement Project? - In some government assisted apartment projects, the distribution of profits (or cash flow) is limited by agreement between the government and borrower. These are called limited disbursement projects.

  • What if I do nothing? - Even if you do nothing, you will have made a decision that has tax consequences. For example; after the depreciation deductions have been exhausted, you will begin the slow process of recapturing these deductions through Phantom Income. You will pay tax on this income at ordinary income tax rates each year when you get your K-1s. If you take no action, the tax burden will continue to rise throughout the life of the mortgage.

  • Can I still use my current accountant and/or attorney? - Yes. We provide tax strategies and research prepared by our tax attorneys and accountants to assist you and your present advisors. We do not replace your competent advisors and we encourage your advisors to review our programs.