Rehabilitation Requirement under IRC Section 147(d) for Financing Acquisitions of Existing Property


Under IRC 147, net bond proceeds of private activity bonds are not permitted to be used to acquire an existing facility unless the first use of the property is pursuant to the acquisition. An exception to this rule is available when a qualifying amount is spent on rehabilitation of the acquired property. The restriction does not apply to qualified mortgage bonds, qualified veterans' mortgage bonds, qualified student loan bonds or qualified 501(c)(3) bonds.

IRC Section and Treas. Regulation

Other Resources

  • Private Letter Ruling 8831033 - Addresses certain issues concerning expenditures for rehabilitation vs. enlargement of a facility
  • Private Letter Ruling 8929073 - Addresses the acquisition of used property versus used component parts
  • General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, Joint Committee on Taxation (pages 944-945)


In the case of a bond subject to Section 147(d), if any portion of the net proceeds of the bond issue is used to acquire used property, unless the requirements of the rehabilitation exception under Section 147(d)(2) are satisfied, the bond is not a qualified bond, and the interest on the bonds is taxable.

Rehabilitation Exception

The prohibition against acquisition of used property with bond proceeds under Section 147(d) does not apply to a building and related equipment if the rehabilitation expenditures equal or exceed 15% of the portion of the acquisition cost of the bond-financed building (and equipment therefor) financed with the bond proceeds. In the case of a structure other than a building, the prohibition against used property does not apply if rehabilitation expenses equal or exceed 100% of the bond-financed cost of the structure. The funds used to pay for rehabilitation expenses can be bond proceeds or funds from other sources.

Rehabilitation expenditures are capital expenditures incurred by the person acquiring the building (or successors-in-interest or the seller under the sales contract) in connection with rehabilitation of the building. In the case of an integrated operation contained in a building before its acquisition, rehabilitation expenditures also include the expenses of rehabilitating existing equipment or replacing the existing equipment with equipment having substantially the same function. These restrictions on acquisition of equipment apply only in the case of used equipment. New equipment generally may be acquired without regard to this restriction, provided the other applicable requirements of the Code are satisfied. Costs of new equipment are treated as rehabilitation costs, however, only in cases where the new equipment replaces equipment having substantially the same function.

As is true under the rules governing projects of residential rental property, expenditures for building fixtures (e.g., stoves, refrigerators, and carpeting) are treated as expenditures for rehabilitation of the building itself. Expenditures for rehabilitation of parking lots, garages, or swimming pools are also included to the extent that the rehabilitated facilities are part of a project.

Rehabilitation expenses do not include amounts incurred more than two years after the later of the acquisition date of the building or the bond issuance date. Certain expenditures, more fully described in Section 47(c)(2)(B), are not qualified rehabilitation expenditures for purposes of the exception under Section 147(d)(2), as follows:

  • An expenditure with respect to which the taxpayer does not use the straight line method of depreciation except that this exclusion does not apply to expenditures consisting of tax-exempt use property, as defined in Section 168(h), or tax-exempt bond financed property, as defined in Section 168(g)(5)

  • The cost of acquiring the building

  • Expenditures attributable to the enlargement of an existing building

  • Expenditures attributable to rehabilitation of a historic structure that is a qualified rehabilitated building, as defined in Section 47(c)(1), unless the Secretary of the Interior has certified the rehabilitation as being consistent with the historic character of the property or the district in which it's located

  • Expenditures allocable to tax-exempt use property, but using a threshold of 50% in lieu of the 35% threshold in Section 168(h)(1)(B)(iii)

  • Certain expenditures of a lessee

In the case of a project involving two or more buildings, the rehabilitation exception is applied on a project basis.

Issue Indicators or Audit Tips


A violation occurs when an issuer of qualified private activity bonds subject to Section 147(d) acquires an existing facility with bond proceeds and fails to meet the requirements of the rehabilitation expenditure exception under Section 147(d)(2).

Audit Tips

  • Verify amount of proceeds used to acquire the existing facility.
    • Review allocation of bond proceeds to project components.
    • Review trustee fund statements showing expenditures of bond proceeds.
  • Verify rehabilitation expenditures, which may include reviewing:
    • Supporting detail for all project expenditures, including draw statements, contracts, invoices and requisitions
    • Trustee statements showing project expenditures
    • Bank statements (owner/developer
    • Depreciation schedules from the applicable income tax return of the conduit borrower