Rehabilitation Tax Credit - Real Estate Tax Tips
The rehabilitation credit applies to costs you incur for rehabilitation and reconstruction of certain buildings. Rehabilitation includes renovation, restoration, and reconstruction. It does not include enlargement or new construction.
Generally, the percentage of costs you can take as a credit is:
- 10% for buildings placed in service before 1936
- 20% for certified historic structures
In Historic Boardwalk Hall, LLC. v. Commissioner, 694 F.3d 425 (3d Cir. 2012), cert. denied, U.S., No. 12-901, May 28, 2013, the Third Circuit considered whether an investor’s interest in the success or failure of a partnership that incurred qualifying rehabilitation expenditures was sufficiently meaningful for the investor to qualify as a partner in that partnership. The Third Circuit determined that the investor's return from the partnership was effectively fixed, and that the investor also had no meaningful downside risk because its investment was guaranteed. The Third Circuit agreed with the Commissioner’s reallocation of all of the partnership’s claimed losses and tax credits from the investor to the principal, holding that “because [the investor] lacked a meaningful stake in either the success or failure of [the partnership], it was not a bona fide partner.
On January 13, 2014, the Internal Revenue Service issued Revenue Procedure 2014-12 which establishes the circumstances under which the Internal Revenue Service will not challenge partnership allocations of § 47 rehabilitation credit by a partnership to its partners.
The credit is temporally increased for property located in specific disaster areas:
- For pre-1936 building (other than certified historic structures) the credit percentage is increased from 10% to 13%.
- For certified historic structures, the credit percentage is increased from 20% to 26%.
The increase applies to property located in disaster areas impacted by Hurricanes Katrina, Rita, and Wilma with respect to qualified rehabilitation expenditures paid or incurred after August 27, 2005 and before January 1, 2012.
Notice 2006-38 provides relief for taxpayers located in these zones. The notice provides that 36 months will be deemed to be a reasonable period to repair and restore qualified rehabilitated buildings without being considered permanently retired from service provided that certain conditions are met. In addition, if the rehabilitated had begun but had not been completed before the President declared a major disaster in the area in which the property is located, the period for the substantial rehabilitation test is tolled for 12 months. For additional information, see Publication 4492, SB Notice 2006-38, and the instructions to Form 3468 (PDF).
Midwestern Disaster Areas
The increase applies to qualified rehabilitation expenditures paid or incurred after the applicable disaster date, and before January 1, 2012 on any building damaged in a Midwestern disaster area as the result of severe storms, tornados, or flooding. For additional information see Publication 4492A and the instructions to Form 3468.
Tax Exempt Use Property
The rehabilitation tax credit is not allowed for expenditures with respect to property that is considered be tax exempt use property. Under the tax-exempt entity leasing rules of 168(h) the threshold to determine if a disqualified lease exists has been raised from more than 35% to more than 50%. The provision is effective for expenditures properly taken into account for periods after December 31, 2007.
Alternative Minimum Tax
Business tax credits generally may not exceed the excess of the taxpayer’s income tax liability over the tentative minimum tax (or, if greater, 25 percent of the regular tax liability in excess of $25,000) Thus, business tax credits cannot offset the alternative minimum tax liability.
For qualified rehabilitation credits determined under Internal Revenue Code Section 47 attributable to qualified rehabilitation expenses properly taken into account for periods after December 31, 2007 the tentative minimum tax is treated as being zero with respect to the rehabilitation tax credit. Thus, a taxpayer may use the rehabilitation tax credit to offset his regular tax liability.
See the instructions on Form 3468, Investment Credit (PDF), for more information.
Place of Filing Notice
If you have claimed a rehabilitation tax credit and the entire project is not completed 30 months after you have claimed the credit and you have not received final certification from the Department of Interior, you must provide written notice to the Internal Revenue Service. The notice must be provided before the last day of the 30 months. The notice as required under Regulation Section 1.48-12(d)(7) is to be mailed to the address shown and you must consent to extend the statute of limitations.
Topical Tax Briefs
Get Frequently Asked Questions (PDF) about the Tax Aspects of Historic Preservation.