Imagine this: You spend money to rehab a building, and then receive tax credits equal to 79% of that money. Wow! Think of what that does for your after-tax return! Tax credits can drastically reduce the amount of money you have at risk. Let’s look at an example that compares what happens to your cash benefits with and without the credits.

Example facts. You buy a property for $314,000 and spend $500,000 on the rehab, for a total investment of $814,000. Of this total investment, you put up $174,000 in cash and obtain a nonrecourse mortgage of $640,000. Then,

you rent the property to third parties for 10 years;

the property appreciates at 5% a year; and

you sell the property at the end of 10 years.

Without the tax credits. On this property, with these facts and no tax credits, you earn an 8.86% after-tax adjusted rate of return on your $174,000 cash investment. (Keep in mind that this is after taxes. In the 30% tax bracket, the pretax equivalent in an interest-bearing investment would have to produce 12.66% to match the 8.86%.) Or you could think of this investment in this way: Invest $174,000 today and walk away in 10 years with $406,661 in after-tax cash. A good return, which can get substantially better with tax credits.

With the tax credits. If you qualify for a 21.38% investment tax credit on this property,

your after-tax adjusted rate of return jumps to 15.62% (that’s equivalent to 22.31% pretax in the 30% bracket);

you walk away in 10 years with $742,812 in after-tax cash (that’s more than $300,000 extra cash); and

none of your cash is at risk in this investment.

The Donald Trump Position

Yes, it’s good to know the tax rules. In this case, your partnership agreement with the government puts you in Donald Trump’s self-proclaimed favorite spot:1

owning a property with no risk, and

owning a property with ... Log in to view full article.