Tax Exemption: Beware of Changes in Intended Use!

A change in the intended use of the property and the loss of tax benefits associated with the transaction pose serious risks to investors.

In order to qualify for a special tax regime, the investment must meet several criteria; if the criteria set forth by law are not met, the investor will not be eligible for the tax exemption program. Among these conditions is often the intended use of the property complex (for example, the residence must be operated as a senior living facility, a nursing home, or a student residence). While it is rare for the intended use as marketed not to be upheld from the start of operations, it does happen that, even if only partially, the operator unilaterally decides to change the intended use of the units—or at least some of them—(for example, changing the use from a senior living facility to a hotel). While this unilateral change may be permitted by the leases (due to wording that does not adequately protect investors), the tax treatment of the transaction may be called into question as a result of the change in use.

Our advice: Be careful when signing the leases!

It is essential to ensure, when signing the leases, that the specific use entitling the investor to the tax benefit is expressly stated in the lease as the exclusive use. If the investment involves a senior living facility and it is indeed this use that qualifies for the special tax regime, the designated use must not be listed as “serviced residence,” as this would allow the operator to engage in other activities that could lead to a reclassification for tax purposes.