Cherrytree Group Blog

With the spike in capital gains rates, tax credits have become a viable planning tool

[fa icon="calendar"] Jan 30, 2016 1:58:27 PM / by Warren Kirshenbaum


Josh Zumbrun’s Wall Street Journal article on December 30, 2015 entitled, "Tax Rate for Top 400 U.S. Taxpayers Climbed in 2013," reported that tax rates on the 400 wealthiest Americans in 2013, increased to their highest average since the 1990s.  The conclusion was that the increase in tax rates was due to policy changes that boosted levies on capital gains and dividends.

 Mr. Zumbrun stated that the average tax rate for these taxpayers was 22.9% in 2013 (the top rate was 23.8%), up from 16.7% in 2012, after they were lowered to 15% in 2003 by President George W. Bush.  He also pointed out that, "over the years, these taxpayers have devised strategies to [lessen their tax burden by deriving more income from] capital gains and dividends. Many of the highest earners sold assets to avoid higher taxes, leading to a huge surge in income in late 2012."

This post is meant to point out that there are options available to these taxpayers other than relying on the spread between capital gains rates and ordinary income tax rates. Specifically, the Internal Revenue Code's business tax credit, known as the Investment Tax Credit (ITC), which is earned by rehabilitating a historical building, providing affordable rental housing, or installing renewable energy.  I realize that you may be thinking that you don't do any of these things, but in this context you would be acting as an investor, using the funds that you would otherwise have had to pay over to the US Treasury, and lowering your tax burden.  You partner with a developer that is fulfilling these functions, who does not generate sufficient profits in the early years to be able to utilize these tax credits, and you are then able to utilize these investment tax credits to offset passive income.  If you are considered to be a real estate professional, then all your income will be considered to be passive.


There is a fluid marketplace for these tax credits, and companies, such as ours, have the depth of knowledge and expertise to guide you through the process. While this area is very complicated, the IRS has detailed in a number of Revenue Procedures, the preferable structures relating to both historic rehabilitation and renewable energy partnerships of this type.  Consider the plight of an old abandoned mill that in earlier years was a manufacturing hub for materials that are now being produced in the Southern US, or even abroad.  If the building is listed on the National Register of Historic Places, located in a historical district, or eligible for listing on the National Register it is able to generate historic tax credits.  The developer of the project may have a plan to convert the old mill into a mix of commercial (perhaps ground floor retail or a restaurant) with rental units on the upper floors.  This would be the kind of project that you would invest in as a partner, and in the process you would be saving and restoring a historical treasure as well as generating valuable tax benefits for yourself.  In terms of a renewable energy project, the tax credits are earned as a percentage of the total construction costs of the installation of renewable energy, such as a solar photovoltaic array.  As a solar array could be located on the roof of a historical building, such as the old Mill Building, these projects can generate multiple tax credits.  In fact, if the developer's plans included keeping a certain amount of the rental units affordable for persons of a certain income strata the project could be eligible for low income housing tax credits as well.



Investing in federal tax credit projects is a strategy that large corporations, financial institutions and insurance companies have invested in for decades.  There is no reason that you could not take advantage of these tax strategies for yourself.


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Topics: Passive Income, federal tax credits, capital gains rates

Warren Kirshenbaum

Written by Warren Kirshenbaum

Warren is the President and CEO of the Cherrytree Group, a tax credit consulting, brokerage, and syndication firm.

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