IRS Building Rehabilitation Tax Credits
As set forth in Internal Revenue Code (IRC) Section 47, costs incurred to renovate, restore, and reconstruct certain buildings, including prewar buildings, may be eligible for the Building Rehabilitation Tax Credit. The credit is generally 10% of costs for non-historic buildings placed in service before 1936, or 20% for certified historic structures. To qualify for the 10% credit, a building must have been placed in service before 1936 and excludes residential rental property. To qualify for the 20% credit, a building must be a certified historic structure as defined within the IRC.
This article summarizes the basics of the program, gives an overview of which development expenditures are eligible and not eligible, and what needs to be filed to apply for the credit:
Historic Rehabilitation Tax Credit (20% Credit)
The term “certified historic structure” is defined by IRC Section 47 as any building (and its structural components) which is either (a) listed in the National Register of Historic Places or (b) located in a registered historic district and is certified by the Secretary of the Interior as being of historic significance to the district. The owner of a rehabilitated building can claim a historic rehabilitation tax credit (20%) on a certified historic structure as long as three conditions are met. The building must be substantially rehabilitated (defined below), placed in service as a building before the beginning of the rehabilitation work, and considered a certified historic structure.
Non-Historic Structure (10% Credit)
The non-historic structure tax credit (10%) may be considered, provided that the building was placed in service before 1936, is used for non-residential rental purposes, has not been physically moved, and meets the internal and external wall retention guidelines as follows:
- 50% or more of the existing external walls are retained in place as external walls
- 75% or more of the existing external walls are retained in place as internal or external walls
- 75% or more of the existing internal structural framework is retained in place
Buildings that are “certified historic structures” are precluded from taking both the 10% non-historic structure tax credit and the 20% certified historic structure credit.
A building shall be treated as having been substantially rehabilitated only if the qualified rehabilitation expenditures during the 24-month period selected by the taxpayer and ending within the taxable year exceed the greater of the adjusted basis of such building (and its structural components), or $5,000. The adjusted basis of the building (and its structural components) shall be determined as of the beginning of the 1st day of such 24-month period, or of the holding period of the building, whichever is later. If the qualified rehabilitation expenditures do not exceed the above threshold, the rehabilitation will not meet the requirement that the property be substantially rehabilitated. In the case of any rehabilitation that may reasonably be expected to be completed in phases set forth in architectural plans and specifications completed before the rehabilitation begins, a taxpayer may use a 60-month period, rather than a 24-month period.
Qualified Rehabilitation Expenditures
Qualified rehabilitation expenditures with respect to any qualified rehabilitated building shall be taken into account for the taxable year in which such improvements to the rehabilitated building are placed in service. Placed in service generally means that the appropriate work has been completed that would allow for occupancy of either the entire building, or some identifiable portion of the building.
The term qualified rehabilitation expenditure does not include:
- Cost of acquisition – The cost of acquiring any building or interest therein
- Enlargements – Any expenditure attributable to the enlargement of an existing building
- Tax-exempt use property
- Expenditures of lessee – Any expenditure of a lessee of a building if, on the date the rehabilitation is completed, the remaining term of the lease (determined without regard to any renewal periods) is less than the recovery period determined under IRC Section 168(c)
- Any expenditure with respect to which the taxpayer generally does not use the straight line method over a recovery period
Filing for the Building Rehabilitation Tax Credits
The rehabilitation tax credit is available to the person(s) and/or entity that holds title to the property. Any taxpayer claiming a rehabilitation tax credit needs to file Form 3468. If an estate or trust, S corporation, or partnership is the owner of the property, that entity must file the 3468. In addition, a shareholder, partner (other than a partner in an electing large partnership), or beneficiary claiming a credit through an S corporation, partnership, or trust must also file a Form 3468 to claim the credit.
After claiming the credit, the owner must hold the building for a full five years after completing the rehabilitation, or they must repay all or a portion of the credit. The amount to be repaid starts at 100% in the first year and reduces by 20% per year during the five year period.
The Historic Rehabilitation Tax Credit provides a good incentive for property owners who are looking to invest in and restore historic buildings. If you have further questions, please reach out to your Withum Real Estate advisor.
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|Stephen Tuffy, CPA, CIA
To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.