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Rehabilitation Tax Credit

  Sanjiv Gupta CPA  Published 
Rehabilitation Tax Credit

Rehabilitation Tax Credit

The purpose of federal and state preservation tax incentives is to encourage the private sector investment in the filed of rehabilitating and re-using historic buildings in order to promote investment in the local enemies.

If an individual owns a historic property, then he has the chance to earn state income tax credit as long as the property is qualified for rehabilitation expenditures. Whether the taxpayer is planning to rehabilitate the primary and secondary residence in the commercial property, then there are state incentives that can help.

The rehabilitation credit is the cost incurred by the individual for rehabilitation. It can also be the reconstruction of buildings. Rehabilitation means restoration, renovation and finally, reconstruction. It does not cover the enlargement or new construction of a venue.

The percentage of the costs that can be credited is:

  • 10% for the buildings that have been in service prior to 1936
  • 20% for historic structures that are certified

Definition of Rehabilitation Tax Credit

A federal tax incentive encourages the real estate developers to renovate, reconstruct and restore old buildings. This is placed in service before 1936 and is also eligible for the 10% credit as well as the certified historic structures that qualify for the 20% credit. This credit also applies to the rehabilitation costs of the building and not the cost of purchasing for the building as well as repairing sidewalks, landscaping and parking lots. The credit and total amount eventually increase slightly if the building is then located in a disaster area.

Things to Remember When Claiming the Rehabilitation Tax Credit

Investment Credit or Form 3468 is also used to claim various investment credits which also includes section 47 of the rehabilitation credit. 3468 must be attached to the income tax return for every year that the individual is qualified for the rehabilitation tax credits. However, the form is not required when it is carried forward or there are back net operating losses all from the tax credit due to rehabilitation costs claimed in that tax year.

Breaking Down Rehabilitation Tax Credit

It is common knowledge that taxpayers must meet the requirements concerning the rehabilitation project as well as the timeframe and also completes it on the date when to claim the credit. The reconstruction and enlargement projects are also not eligible for the tax credit along with the tax-exempt properties that are qualified. Only the titleholder of this property can claim this specific credit. States can also offer the rehabilitation tax credits that are used to encourage development.

There are still limitations on using the low-income housing credits and its rehabilitation. The guidelines must also apply with the IRS especially when it comes to auditing the credit projects. The limitations that are included are the ones at risk and are of passive loss. Finally, when planning opportunities, taxpayers are encouraged to use the low-income housing credits as well as its rehabilitation especially the use of the credits in tandem.

Who Must File

Taxpayers that claim the rehabilitation tax credit are required to file Form 3468. This also includes the partner, shareholder, and beneficiary that claims the credit through the partnership, S corporation or the trust.

In addition to this, if the estate or the trust, partnership or the S corporation is the very owner of that historic structure, then the taxpayer must file the Form 3468. The lessor also provides that the project number from the National Park Service to the lessee.

Property or Source of Credit

If the credit was claimed simply for the rehabilitation of a historic structure and was done by the owner of the property, then the National Park Service (NPS) project number must also show the owner return. Remember to not use the state or internal identification numbers for this purpose.

If the lessee is the owner of the property, then the lessee must fill-up Part 1 of Form 3468 and also provide the project number from the National Park Service.

If the expenditures for the rehabilitation has been passed through to the S corporation, estate, partnership or trust, then the EIN or the employer identification number of the pass-through can also be shown.

Date of Certification of the Completed Work

Form 3468 also requires the date when the NPS Reviewer has signed the Form 10-168 for NPS. It is important to not use the dates listed for Part 1 or 2 as well as the application date listed on Part 3 for the NPS Form 10-168.

If the final certification has not been received around the time that the tax return has been filed for the year the credit has been claimed, then the copy of the first page of Form 10-168 of the NPS Form Historic Preservation Certification Application, which is the Part 2 of the Description of Rehabilitation. It has an indication that this was received by the Department of the Interior as well as the State Historic Preservation Officer and with that is the proof that the building is definitely a certified historic structure. Taxpayers who electronically file and submit this information along with the Form 8453. Certification information is also required to be received in that very year.

Carryforward or Carryback

Taxpayers are not encouraged to file the Form 3468 if the credit is a carryforward or carryback from previous years. What must be done instead is to report the credit on Form 3800? If required, this can also be filed on Form 8582-CR.

Tax-Exempt Use Property

The rehabilitation tax credit cannot be allowed for expenditures with the property that is regarded as tax-exempt. As written in the tax-exempt entity, it leases the rules listed on 168(h) and the threshold determines if this is a disqualified lease that exists and has been increased to beyond 50%.

Alternative Minimum Tax

The qualified rehabilitation credits also determined in the Internal Revenue Code listed in Section 47 is attributed to the qualified rehabilitation expense property. It also takes into account the alternative tax rules that are not applicable. Therefore, a taxpayer must use the rehabilitation tax credit as the way to offset the regular tax liability.

Place of Filing Notice

If the taxpayer has claimed the rehabilitation tax credit then the entire project cannot be completed 30 months after the credit has been claimed and the individual has not yet received the final certification straight from the Department of Interior. If this is the case, then they must also provide a written notice to the IRS or the Internal Revenue Service. The notice that this is provided before the last day of the 30-month deadline. It is then required by the Regulation Section 1.48-12 that this be emailed to the address of the individual and must also have the consent to extend the limitations of the statute.

Qualifications for the Rehabilitation of the Historic Properties Credit

An individual is entitled to a refundable credit if the business:

  • is allowed to have a federal credit listed under the IRS and in Section 47. This is for the qualified rehabilitation expenses that are related to the rehabilitation of certified historic structures.
  • part or all of the rehabilitation project can be located within the census tract and is identified as below 10% of the state median family income and also calculated on every first day of every year by using the recent five-year estimate that came from the American Community Survey and is published by US Census Bureau.

Any new credit that has been earned for the property and is placed in the service on or even after January 1, 201 5 and is not utilized in the current tax year and treated as the overpayment or refund of the credited tax to the following year’s tax revenue. This change is also applicable to the tax years that start on or after January 1, 2015. The carryforward or credit from previous years cannot be applied toward the tax for the ongoing tax year. It has also been carried over to the following years indefinitely.

 What is the total credit?

  • For the tax years between January 1, 2010 and January 1, 2020, the credit amounts to 100% of the total federal credit amount that is allowed on the historic structure.
  • The total amount of the credit cannot go beyond $5 million for every structure.

Requirements for Recordkeeping

Taxpayers have to prove that they are entitled to the tax credits. In the course of the audit, they are required to also provide documentation so that the entitlement is substantiated and based on specific facts that are claimed by the tax credit.

Eligibility Requirements for Tax Rehabilitation Credit

 There are 4 factors that help decide whether the rehabilitation project meets the basic requirements for the suggested tax credit of 20%.

  1. The historic building is listed in National Register of Historic Places or certified in contributing to the significance of what is called the “registered historic district.”

Buildings are listed individually in the National Register of Historic Places or even part of the historic district. Taxpayers must also contact the local historic district commission, SHPO or the State Historic Preservation Office, or municipal planning office to find out whether the building is listed or not.

If the property is located in a certified state and local district or a National Register district, then it must be designated as a structure that also retains the historical integrity by the National Park Services. It must also contribute to the historical character of the district and qualify as what is called the “certified historic structure.” Note that not every building in the mentioned district has contributed to this. When the historic districts have been designated, then this is usually associated with particular time period or significant periods, like “mid-1800s to 1935.” In this district, the 1950 office building cannot contribute and also not qualified for the 20% rehabilitation tax credit.

The owner of the building can also request from the National Park Service in designating the building and also listing it as a “certified historic structure” and also complete and submit this as part of the Historic Preservation Certification Application.

  1. The project must also meet the “substantial rehabilitation test.”

In a nutshell, this pertains that the rehabilitation cost must be more than the building’s pre-rehabilitation cost. This is also the test that must be required within the two years or within five years of the project as soon as it is completed in multiple phases.

The overall cost of the project also goes beyond $5,000 or the building has been adjusted on a regular basis. The formula listed below is how a project can be determined as substantial and qualified for the credit.

A – B – C + D = adjusted basis

A = this is the purchase price of the land and/or the building
B = the cost of the property when it has been purchased
C = the depreciation that is taken for the income-producing property
D = the cost of the capital improvements that were made since the purchase

Some of these expenses may not be associated with the project that is qualified for the tax credit, like the new rear addition, landscaping and new kitchen appliances.

  1. Rehabilitation work must be done as suggested by the Standards for Rehabilitation of the Secretary of the Interior.

There are ten principles that ensure the historic character of any building that has been preserved during rehabilitation. These should be followed. Standards are also applied to various projects in reasonable manners as long as these take into consideration the technical and economic feasibility.

  1. After rehabilitation, this historic building is also used for income-producing purposes all for five years. The owner-occupied residential properties are not qualified for a federal rehabilitation tax credit.

 The 20% credit is only available to the properties that are rehabilitated for the income that produces purposes like industrial, rental residential, commercial, agricultural and apartment use. The credit cannot be used when rehabilitating the private residence.

However, if the portion of the personal residence is not conducted for business, for example, a rental apartment or office, then there are instances that this amounts to the over-all rehabilitation costs that are spent on the portion of the residence that makes it eligible for the credit.