In this second part of our series on tax breaks for investors, we explore three more provisions that might apply to your situation and provide you with valuable savings.
Valuable Losses on Section 1244 Stock
If you lose money on your investment in very small domestic companies, you might be entitled to ordinary losses instead of capital losses. In order to qualify for this treatment, you need to meet some very specific technical requirements on what is referred to as Section 1244 stock.
First, we need to look at the size of the company. The corporation you invested in must have $1 million or less in total capital when the stock was issued. Second, the corporation is not allowed to make more than 50 percent of its income from passive investments. Third, you must be an individual who purchased the stock directly from the company. If you received the corporate stock as a form of compensation, then you are disqualified from the special tax treatment.
If you take losses on a stock investment that meets all of these requirements, then you will qualify for the special treatment of your losses against ordinary income. The amounts of ordinary losses you can take are limited to $50,000 for individuals and $100,000 on joint tax returns.
Keep in mind that this is just an overview of Section 1244 losses and that details of the rules can be very complex.
New Markets Tax Credit
The New Markets Tax Credit Program was established to incentivize investment in operating businesses and real estate projects in low-income communities to foster growth and economic development. Investors benefit from the NMTC Program as it allows individual and corporate investors to receive federal tax credits in exchange for investing in special financial institutions called Community Development Entities.
The total tax credit possible under the NMTC Program is 39 percent of the invested amount. The credit gets claimed over a seven-year period at a rate of 5 percent for the first three years and 6 percent over the next four years. Another wrinkle in the rules is that you cannot sell or redeem your CDE investment until after the full seven-year period is over.
In order to be eligible, institutions need to be certified as CDEs by meeting the following three requirements. First, the investor must be a domestic corporation or partnership. Second, the entity must prove that its main purpose is serving low-income communities. Finally, the entity needs to stay accountable to the residents of the communities they serve by allowing them representation on their governing or advisory boards.
Low-Income Housing Credits
Substantial tax credits are available to investors through low-income housing credits. The amount of the credits can vary depending on the nature of the property and details of the investment. The good news for individual investors is that the developers of the properties usually do all of the work securing and complying with requirements. Investors typically purchase interests in the property through limited partnerships, which then pass through the tax credit to the individual.
A project must meet four major requirements to be eligible for low-income housing tax credit consideration.
- The property must be a residential rental property. It also needs to be a new building or require rehab if it is an existing property.
- The property must abide by certain occupancy threshold requirements. These requirements ensure that a minimum number of units are actually rented to low-income households.
- The property must restrict rent charges on low-income units, including utility charges.
- It must generally operate under the rent and income restrictions outlined above for 30 years or longer.
Next month we will conclude our series with the last three tax breaks for investors. Until then, if any of the items we discussed this month appear to apply to your situation, it is definitely worth a discussion with your tax advisor.