Kyle Sund, Moss Adams - "Tax Incentives for Multifamily Investors" | HFO Investor Roundtable 2023

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HFO Investor Roundtable:

Tax Incentives for Multifamily Investors

Kyle Sund, EA Tax Credits & Incentives Senior Manager, Moss Adams
January 4, 2023
• Tax deferral strategy that frontloads depreciation deductions into the early years of real estate ownership • Identifies, separates, and classifies real and personal property assets or buildings and equipment components into shorter recovery periods
2 • Significantly shorter tax lives—5-, 7-, and 15-years—rather than the standard 27.5or 39-year depreciation periods
27.5-year property: Residential rental property, such as multifamily properties and senior housing (independent living, assisted living, memory care)
39-year property: Nonresidential real property—all other commercial property • Increase current and future deductions, as well as catch-up “missed” deductions for past depreciation • Reduces current tax liability—time value of money Identify Separate Classify
Cost Segregation
• New construction projects • Remodels, expansions • Tenant improvements • Property acquisitions • Allocations of purchase price • Like-kind exchanges (Sec. 1031) • “Look Back” studies (Form 3115) • Catch-up depreciation missed on past tax returns without amending returns • Applicable to any of the above project types • Bonus Depreciation • 100% for assets placed in-service 9/28/2017 to 12/31/2022 • Phases down by 20% per year beginning in 2023 Cost Segregation Studies 3
• Has taxable income and can utilize accelerated depreciation • Owns significant building and/or land improvements—can go as far back as necessary via Form 3115 • Expanding and/or remodeling facilities • $1 million or greater depreciable basis for a purchase or new construction • $250,000 or greater of interior improvements • Will hold the property for more than 3-5 years Taxpayer Criteria 4
Reclassifications 5 30–60% 20–50% 25–45% 20–40% 20–35% 20–30% 10–30% 10–20% 0% 10% 20% 30% 40% 50% 60% 70% Heavy manufacturing Self-storage facility, medical office, hospital Auto dealership, winery Grocery store, restaurant, light manufacturing, golf and resort Bank, assisted living facility, garden-style apartments Office
warehouse facility, high-rise apartments PERCENTAGE
building Shopping
hotel, fitness health
Distribution or

Bonus Depreciation

6 *If acquired and placed in service after September 27, 2017
Inflation Reduction Act Section 179D: Energy Efficient Commercial Building Tax Deduction Section 45L: New Energy Efficient Homes Tax Credit 7
• Pre-IRA deduction: Energy efficient commercial building deduction of $1.80 per square foot (adjusted for inflation: $1.82/SF in 2021, $1.88/SF in 2022) • Available for newly constructed buildings or building improvements placed in-service after January 1, 2006 • Energy performance must be modeled by a qualified third party and certified by a contractor or professional engineer licensed in the state where the building is located • Pre-IRA, Section 179D deduction can be claimed by: Section 179D Background (Pre-Inflation Reduction Act) • Created in 2006 • Made permanent in 2020 8 Owners and tenants of commercial buildings who’ve built or installed improvements Owners of fourstory or greater residential buildings who’ve built or installed the improvements Designers of government-owned, energy-efficient buildings (architects, engineers, or contractors)

Inflation Reduction Act Modifies Section 179D

• Increase in potential deductions from $1.88 per square foot to $5.00 per square foot

• Non-profits can now allocate deductions to the designer

• Bonus deduction tied to prevailing wage and apprenticeship requirements

Section 45L: Inflation Reduction Act Extension of Existing Energy Efficient Homes Credit 10 • Available for single-family home builders and multifamily developers who have basis in the construction of new (or renovated) dwelling units  $2,000/dwelling unit tax credit that is transferred (sold/leased/rented) during your tax year  $1,000 or $2,000/unit tax credit for manufactured home developers  Units meet or exceed a 50% reduction in energy consumption from baseline unit using 2006 International Energy Conservation Code (IECC) standard • Eligible dwelling unit types:  Single-family homes + townhomes  Multifamily developments (3-stories or less)  Senior living facilities (not memory care units)  House boats  Manufactured and mobile homes • Amend tax returns to claim credits in prior open tax years Existing credit was extended retroactively from Jan 1, 2022 to Dec 31, 2022
• 2023 energy certification changes: Department of Energy’s (DOE) ENERGY STAR Single-family Homes National Program, DOE’s ENERGY STAR Manufactured Homes, DOE’s ENERGY STAR Multifamily New Construction National Program, Optional DOE’s Zero Energy Ready Homes (ZERH) • Subject to prevailing wage (PW) requirements – in some cases, HUD and LIHTC projects already require prevailing wages • Multifamily properties 4-stories or greater are now eligible for 45L – as well as 179D – beginning in 2023 Section 45L: Inflation Reduction Act Credit Amounts from 2023 to 2032 11 Taxpayer Credit through Dec. 31, 2022 Credit 2023 - 2032 ENERGY STAR Credit 2023 - 2032 w/ ZERH Credit 2023 - 2032 W/ PW Credit 2023 - 2032 w/ ZERH + PW Single-family Home Builder $2,000 $2,500 $5,000 PW NA PW NA Multifamily Developer $2,000 $500 $1,000 $2,500 $5,000 Manufactured Home Developer $1,000 or $2,000 $2,500 $5,000 PW NA PW NA
Reduction Act: “Bonus” Deductions/Credits
Apprenticeship Requirements 12  If construction begins prior to January 30, 2023, the project is deemed to meet the prevailing wage and apprenticeship requirements for the increased “bonus” amounts for 179D and 45L o Physical work test and 5% safe harbor  Prevailing Wage Requirement: o Must be paid to laborers and mechanics employed by the taxpayer, a contractor, or a subcontractor to construct the property o Taxpayer is required to maintain sufficient records to document work performed and wages paid  Apprenticeship Requirement: o Total labor hours of the construction of the facility is performed by qualified apprentices must exceed applicable percentages o Apprenticeship labor hour percentages by date construction begins: • Before January 1, 2023: 10% • After December 31, 2022 and before January 1, 2024: 12.5% • After December 31, 2023: 15% o Not applicable to 45L credit