x Casualty Loss - Spectrum Enterprises


Casualty Loss

By Harold Tucker, Compliance Analyst

MY  UNIT JUST BURNED DOWN! A FIRE TRUCK LOST ITS BREAKS AND HIT OUR BUILDING, IT’S OFF-LINE! OUR BUILDING  WAS WIPED OUT BY A HURRICANE! Believe it or not these are all situations Spectrum has seen at properties. This raises the question what happens when you have loss of property from a sudden unexpected event at your project? The 8823 guide says:

“Physical damage to LIHTC projects caused by casualty events and which render LIHC

residential units or buildings, or common areas associated with the property,

unsuitable for occupancy is reported as noncompliance with the UPCS or local


So there you go. We are going to write you up and the IRS will be knocking at your door. Have a good day.

WAIT! Okay, it is true this will need to be reported to the IRS. But the IRS has some “Special Rules” which in some circumstances may not mean recapture of credits. In Section 42 (j) Recapture of credit subparagraph (4) Special rules, Section (E) states:

“No recapture by reason of casualty loss. The increase in tax under this subsection

shall not apply to a reduction in qualified basis by reason of casualty loss to the extent

such loss is restored by reconstruction or replacement within a reasonable period

established by the Secretary.”

Remember a casualty loss invokes no recapture if the unit or building is returned to good condition in a timely fashion. Good condition means habitable and suitable for occupancy. However credits are lost while the unit(s) or building(s) are offline.

If your building or unit is offline due to a natural disaster and the government or FEMA declares your area a “Natural Disaster” area then the credit clock stops until you return the unit(s) or building(s) to good condition. Therefore, you do not lose any credits AND there is no recapture. (Assuming the owner gets the units and buildings back to habitable condition).

How do you prepare for this type of loss at your project? Spectrum recommends procuring loss of credits coverage.  A good formula to use is take the total allocation of the project, divided by 10 years, divided by 12 months, divided by the number of units. This will give you the basic value of a credit for a month. Then simply determine how long you wish to have coverage.

Remember not all damage to your property can avoid recapture. Act quickly to reconcile the damage. This is always your best option.


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