LIHTC credit recapture: what triggers it and when it stops

Credits are claimed over 10 years, but the building has to stay compliant for 15. Recapture is the enforcement: if a building’s qualified basis at the close of any year in the compliance period is less than it was the year before, the owner’s tax goes up by the credit recapture amount (IRC 42(j)(1)).

What gets recaptured

Not all the credits. The recapture amount is the accelerated portion of the credits already taken on the lost basis, plus interest at the overpayment rate (42(j)(2)). The accelerated portion is the difference between the credits actually claimed for prior years and what would have been claimed if the credits for the whole compliance period had been spread evenly over 15 years instead of 10 (42(j)(3)).

A worked example: $100,000 a year of credits on basis that’s lost after year 5. Claimed so far: $500,000. Spread over 15 years, the same $1,000,000 of total credits would have been $66,667 a year, or $333,333 for five years. The accelerated portion is $166,667, about a third of what was taken, plus interest. That one-third share holds at any point during the credit period on this kind of loss, ignoring first-year proration.

What triggers it

A drop in qualified basis, such as a unit that stops counting: an over-income tenant combined with a next-available-unit violation, a unit rented to an ineligible household, or a casualty loss left unrepaired.

A disposition of the building or an interest in it, unless it’s reasonably expected the building will keep operating as a qualified low-income building for the rest of the compliance period (42(j)(6)).

Recapture applies only to credits that actually reduced tax (42(j)(4)(A)). For a partnership with 35 or more partners, unless it elects out, the partnership itself is treated as the taxpayer, so a partner selling its interest isn’t a disposition that triggers recapture (42(j)(5)).

The bond requirement is gone

Before July 31, 2008, a seller of a building inside the compliance period had to post a bond or other security to avoid recapture. The Housing and Economic Recovery Act of 2008 removed that requirement for dispositions after July 30, 2008 (42(j)(6) as amended), so sales during the compliance period no longer need it, as long as the building is reasonably expected to stay compliant.

When it stops

At the end of the compliance period. A drop in qualified basis after that date doesn’t trigger recapture, though the extended use agreement still binds the property. The compliance timeline gives the exact year-end for a building.