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Investors who rehab should be aware of reconversion grants. These grants are sometimes called deconversion grants and are offered by some city governments as an incentive to convert multiunit rental properties back into single-family homes. Positive impact is priority
One such reconversion program in Aurora, Ill, a city 40 miles west of downtown Chicago, began in 1994. And to date, it has paid out $2.9 million to property owners to help remove a total of 198 rental units from the area. The city provides financial incentives and assistance per unit removed, as long as the structure is restored to its original use--$28,000 is given for the first unit removed, $25,000 for the second, and $22,000 for the third, up to a maximum grant of $75,000 per structure. Priority is given to applications that can show a significant impact on the neighborhood by this reconversion activity. What it takes
In general, reconversion involves "undoing" what was done earlier, according to Brent Schepp, who just reconverted a three-unit Aurora home. Reconversion will often involve knocking down walls that have been built to partition off an inside stairway, for instance. And the renovations can also involve bringing the property into line with city codes, which can be quite extensive. In Brent's case, the reconversion involved taking out two extra kitchens upstairs, and turning those rooms back into bedrooms. He simply terminated the plumbing inside the walls (although sometimes extra plumbing is removed all the way to the basement). In addition, Brent's property had three gas meters and three electric meters that had to be reduced to just one of each. Students succeed
Rosie and John Blowers, two of Carleton's students, are real estate investors in a college town in Michigan. They reconvert large classic homes, into which 10 units had been crammed for student housing, into more manageable two- to three-unit properties. "The properties became easier to rent, and people ended up staying longer," Rosie says. Neighborhood improvement
A recent Fannie Mae Foundation award went to The Alliance for Building Communities Doorway to Homeownership initiative, in the Lehigh Valley area of Pennsylvania, for its reconversion program.
The program reconverts roomy, older homes that had been divided into multiunit rentals back into spacious, affordable single-family homes, and then makes those homes available to low-income families.
The idea behind the program is that divided houses with rental units sometimes can degrade the neighborhood--they may house transients who might lack community pride. Pride restored
Changed back into a single-family property, the house may very well be purchased by a homeowner with a much greater pride of ownership. The end result would be to the betterment of the community and the city. The program is also about density reduction in areas that were originally single-family homes and are now multiunit rental houses. Such areas are often characterized by overcrowding and crime. To tax or not to tax
One question that has come up lately is whether re-conversion grants are taxable. In the past, it has been left up to the recipients of the grant whether to declare the money or to explain to the federal government why it shouldn't be taxed. As a precaution, local government officials sent out 1099 forms to grant recipients for the very
first time last year. Many owners worried that this might become a tax burden and were therefore disinclined to take full advantage of the program. Changes ahead?
If the grants end up being taxed, municipalities may have to consider raising the amount of the grants or reducing the amount of reconversion work required of the recipients.
Tax consultants are looking into whether the money can be considered capital gains which, in turn, could be offset by capital losses. Consult your tax preparer to determine your tax liability.
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