District of Columbia Laws Affecting District Real Estate Owners | Cozen O’Connor

ELIMINATION OF TERMINATION EXEMPTION FOR THE DISTRICT OF COLUMBIA UNINCORPORATED BUSINESS FRANCHISE TAX

Under the code of the District of Columbia, resident or nonresident limited liability companies and general and limited partnerships (as “unincorporated businesses”) that own real estate in the District of Columbia are subject to the 8.25% franchise tax on net income from unincorporated businesses in the district. Prior to January 1, 2021, there was a regulatory exemption from the imposition of the franchise tax for unincorporated businesses on an unincorporated business in respect of any gain (other than an ordinary gain resulting from recapture of depreciation) from the sale or other disposition of assets, including real estate, which resulted in the “termination” of the unincorporated business (for example, the sale of all entity’s real property and the termination of the unincorporated business as a result). Instead, tax on the gain was imposed by the District of Columbia on the owners of the unincorporated business, so long as the owners had sufficient connection to the District of Columbia to be subject to it. tax. As a result, the district’s unincorporated business franchise tax previously did not apply directly to the gain from the sale by a limited liability company or partnership of all of its real estate to the extent that the sale resulted in the termination of the unincorporated business.

Last fall, the District passed the Unincorporated Business Franchise Tax Amendment Act of 2020, which eliminated this exemption and took effect January 1, 2021. Now, the franchise tax of 8.25% on unincorporated businesses in the district will be taxed directly to a limited liability company, partnership or other unincorporated business in respect of any gain from the sale of the real estate of the district. business in the District of Columbia, even if such property constitutes all of the property of the entity located in the District of Columbia.

Careful initial structuring of the ownership and disposition of real estate assets could avoid the imposition of this tax in some cases.

DISTRICT OF COLUMBIA LOW-INCOME HOUSING TAX CREDIT

The District, in its 2021 budget, established a low-income housing tax credit equal to 25% of the value of any federal low-income housing tax credit allocation received after the October 1, 2021, and which is approved by the District Housing and Housing Department. Community development on or after October 1, 2021. This additional credit can be applied against district revenue, insurance premiums, and franchise taxes and can be claimed equally for 10 years, providing an added benefit to properties that are otherwise financed to generate low federal revenue. . – housing income tax credits.

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