A friend is part of an investor group who have received a Federal Grant which must be used for purchase and rehab of residential property to be rented to low-income people for a period of at least 20 years.
The following questions have been posed:
1, Is the Grant considered _Income_ for tax purposes?It seems to me that the answer would be no -- but rather a contractual investment with limitations. Any property purchased and improved would have a zero cost basis after having fulfilled the contractual obligation over the required 20 years, when it is subsequently sold.
(Note: There is a specific clause which requires repayment of any grant funds which are converted by sale of a property before the full
20-year obligation is met.)
- Would the purchase price and rehab costs be depreciable?
If the grant is a conditional loan until the 20th year has concluded, at which point it converts to a "gift" awarded for completion of the contractual obligation -- then until that point, it's money at risk, and depreciation expensing ought to be allowable, just as would apply to borrowed money used to purchase and operated a rental facility.
Presumably, once the grant is perfected and upon sale, there would be a new issue: Should the previously-taken depreciation then be subject to "recapture" via Form 4797? Seems logical to me.
Having these questions posed, however, leads to a prudent man's need for guidance from those who might know more. Is there anyone out there who knows of any specific IRS regs or guidance on treatment of Federal Housing Grants and/or tax court rulings which might weigh on this matter?
Bill