Impact-Fees Ruling Has Favorable Impact

Rev. Rul. 2002-9 held that impact fees, which real property developers pay, are indirect costs that developers should capitalize and add to the basis of buildings constructed. As such, low-income housing developers and operators can include the fees in computing the low-income housing credit.

This guidance resulted from the Industry Issue Resolution (IIR) pilot program. Treasury and the IRS have been working to develop a clear position on this issue, which was submitted for IIR consideration by the Real Estate Roundtable.

Impact Fees

Impact fees are one-time charges that a state or local government imposes on new development (or expansion of an existing development), to finance specific offsite capital improvements for general public use that the new or expanded development necessitates. Generally, impact fees would be refundable (in full or in part) if the property developers do not ultimately construct the new or expanded development as planned.

Facts

T is a taxpayer in the business of developing, owning and leasing residential rental property. T purchased unimproved land located in County C on which he plans to construct a new residential building, which he will rent to tenants. T submitted a development plan to C, which indicated that he expects the building to have several rental units.

C required T to pay various impact fees (e.g., for schools and law enforcement and fire-protection facilities) to compensate for the new building's financial impact. C calculated the impact fees based on T's projection of the number of rental units and the building's size. T paid the impact fees when C issued the construction permit for the building.

Holding

Impact fees that a taxpayer incurs for constructing a new residential rental building are capitalized costs allocable to the building under Secs. 263(a) and 263A.

Accounting-Method Change

Any change in a taxpayer's treatment of impact fees to conform with Rev. Rul. 2002-9 is an accounting-method change.

A taxpayer who wants to change accounting method so that these fees conform to this ruling must follow the automatic-accounting-method-change provisions in Rev. Proc. 2002-9 (or its successor), as modified and clarified by Ann. 2002-17, with the modifications specified in Rev. Rul. 2002-9.

From Stuart R. Josephs, CPA, Tax Assistance Practice (TAP), San Diego, CA