Income Taxes

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities of the TRS entities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax liabilities and assets are as follows (in thousands):



	December 31,
	2013			2012
Deferred tax liabilities:
Partnership differences	$	50,290		$	29,745
Deferred revenue	25,596			23,139
Capitalized interest	11,424			16,157
Other	49			—
Total deferred tax liabilities	$	87,359		$	69,041

Deferred tax assets:
Net operating, capital and other loss carryforwards	$	62,651		$	66,145
Differences in basis of real estate	35,604			33,321
Receivables	440			1,183
Accruals and expenses	9,272			9,398
Tax credit carryforwards	12,905			7,724
Management contracts and other	393			629
Total deferred tax assets	121,265			118,400
Valuation allowance	(3,553		)	(4,531		)
Net deferred income tax assets	$	30,353		$	44,828

During the year ended December 31, 2013, we reduced the valuation allowance on a net basis by approximately $1.0 million, largely due to the expiration of tax credit carryforwards that had been fully reserved, with no impact on the effective tax rate.

A reconciliation of the beginning and ending balance of our unrecognized tax benefits is presented below (in thousands):



	2013			2012			2011
Balance at January 1	$	3,536		$	3,917		$	4,071
Reductions as a result of a lapse of the applicable statutes	(764		)	(684		)	—
Additions (reductions) based on tax positions related to prior years and current year excess benefits related to stock-based compensation	99			303			(154		)
Balance at December 31	$	2,871		$	3,536		$	3,917

Because the statute of limitations has not yet elapsed, our Federal income tax returns for the year ended December 31, 2009, and subsequent years and certain of our State income tax returns for the year ended December 31, 2007, and subsequent years are currently subject to examination by the IRS or other taxing authorities. Approximately $2.2 million of unrecognized benefit, if recognized, would affect the effective rate.

On October 25, 2012, the IRS issued Final Partnership Administrative Adjustments with respect to the Aimco Operating Partnership’s 2006 and 2007 tax years. On January 18, 2013, AIMCO-GP, Inc., in its capacity as tax matters partner of the Aimco Operating Partnership, filed a petition challenging those adjustments in the United States Tax Court in Washington, D.C. On December 20, 2013, the parties agreed on the terms of a settlement of that litigation. The court ordered the parties to file stipulated decision documents by March 20, 2014, or to file a joint status report. The settlement regarding the 2006 or 2007 proposed adjustments will not have any material effect on our unrecognized tax benefits, financial condition or results of operations.

Our policy is to include any interest and penalties related to income taxes within the income tax line item in our consolidated statements of operations.

In accordance with the accounting requirements for stock-based compensation, we may recognize tax benefits in connection with the exercise of stock options by employees of our TRS entities and the vesting of restricted stock awards. During the years ended December 31, 2013 and 2012, we had cumulatively $0.6 million and $0.5 million, respectively, in excess tax benefits from employee stock option exercises and vested restricted stock awards. None of the excess tax benefits have yet been realized.

Significant components of the income tax benefit or expense are as follows and are classified within income tax benefit in continuing operations and income from discontinued operations, net in our statements of operations for the years ended December 31, 2013, 2012 and 2011 (in thousands):



	2013			2012			2011
Current:
Federal	$	—		$	—		$	(109	)
State	63			1,047			604
Total current	63			1,047			495

Deferred:
Federal	7,621			7,116			(143		)
State	1,685			812			(903		)
Total deferred	9,306			7,928			(1,046		)
Total expense (benefit)	$	9,369		$	8,975		$	(551	)
Classification:
Continuing operations	$	(1,959	)	$	(858	)	$	(5,941	)
Discontinued operations	$	11,328		$	9,833		$	5,390

Consolidated income or loss subject to tax consists of pretax income or loss of our TRS entities and gains or losses on certain apartment community sales that are subject to income tax under section 1374 of the Internal Revenue Code. For the years ended December 31, 2013, 2012 and 2011, we had consolidated income subject to tax of $46.6 million, $19.0 million and $5.0 million, respectively. The reconciliation of income tax attributable to continuing and discontinued operations computed at the U.S. statutory rate to income tax expense (benefit) is shown below (dollars in thousands):



	2013					2012					2011
	Amount			Percent		Amount			Percent		Amount			Percent
Tax at U.S. statutory rates on consolidated income or loss subject to tax	$	16,326		35.0	%	$	6,642		35.0	%	$	1,756		35.0	%
State income tax expense (benefit), net of Federal tax (benefit) expense	1,748			3.7	%	1,859			9.8	%	(299		)	(6.0	)%
Effect of permanent differences	(296		)	(0.6	)%	(256		)	(1.3	)%	(565		)	(11.3	)%
Tax effect of intercompany transfers of assets between the REIT and taxable REIT subsidiaries (1)	(4,272		)	(9.2	)%	730			3.8	%	(1,965		)	(39.2	)%
Tax credits	(4,137		)	(8.9	)%	—			—	%	—			—	%
Increase in valuation allowance	—			—	%	—			—	%	522			10.4	%
	$	9,369		20.0	%	$	8,975		47.3	%	$	(551	)	(11.1	)%


(1)	Includes the effect of assets contributed by the Aimco Operating Partnership to TRS entities, for which deferred tax expense or benefit was recognized upon the sale or impairment of the asset by the TRS entity.

Income taxes paid totaled approximately $0.6 million, $1.1 million and $1.2 million, respectively, in the years ended December 31, 2013, 2012 and 2011, respectively.

At December 31, 2013, we had net operating loss carryforwards, or NOLs, of approximately $150.8 million for income tax purposes that expire in years 2027 to 2032. Subject to certain separate return limitations, we may use these NOLs to offset all or a portion of taxable income generated by our TRS entities. We utilized approximately $15.8 million of NOLs during the year ended December 31, 2013, as a result of taxable gains recognized by our TRS entities. As of December 31, 2013, we had low-income housing and historic tax credit carryforwards of approximately $13.4 million for income tax purposes that expire for the tax years 2017 to 2032. The deferred tax asset related to these credits is approximately $12.9 million.

For income tax purposes, dividends paid to holders of Common Stock primarily consist of ordinary income, return of capital, capital gains, qualified dividends and unrecaptured Section 1250 gains, or a combination thereof. For the years ended December 31, 2013, 2012 and 2011, dividends per share held for the entire year were estimated to be taxable as follows:



	2013				2012				2011
	Amount		Percentage		Amount		Percentage		Amount		Percentage
Ordinary income	$	0.17	17.9	%	$	—	—	%	$	—	—	%
Capital gains	0.13		13.9	%	0.35		46.6	%	0.12		24.0	%
Unrecaptured Section 1250 gain	0.66		68.2	%	0.41		53.4	%	0.36		76.0	%
	$	0.96	100.0	%	$	0.76	100.0	%	$	0.48	100.0	%

We designated the per share amounts above as capital gain dividends in accordance with the requirements under the Code. Additionally, we designated as 2013 capital gain dividends a like portion of preferred dividends.