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Tax reform brings changes to real estate rehabilitation tax credit

IRS Tax Reform Tax Tip 2018-161, October 17, 2018

The rehabilitation tax credit offers an incentive for owners to renovate and restore old or historic buildings. Tax reform legislation passed in December 2017 changed when the credit is claimed and provides a transition rule: 

  • The credit is 20 percent of the taxpayer’s qualifying costs for rehabilitating a building.
  • The credit doesn’t apply to the money spent on buying the structure.
  • The legislation now requires taxpayers take the 20 percent credit spread out over five years beginning in the year they placed the building into service.
  • The law eliminates the 10 percent rehabilitation credit for pre-1936 buildings.
  • A transition rule provides relief to owners of either a certified historic structure or a pre-1936 building by allowing owners to use the prior law if the project meets these conditions:
    • The taxpayer owned or leased the building on January 1, 2018, and the taxpayer continues to own or lease the building after that date.
    • The 24- or 60-month period selected by the taxpayer for the substantial rehabilitation test begins by June 20, 2018.

Taxpayers use Form 3468, Investment Credit, to claim the rehabilitation tax credit and a variety of other investment credits. Form 3468 instructions have detailed requirements for completing the form.

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