Tax Incentives for Real Estate Rehabilitations
| Publication year | 1982 |
| Pages | 1810 |
| Citation | Vol. 11 No. 7 Pg. 1810 |
1982, July, Pg. 1810. Tax Incentives for Real Estate Rehabilitations
Congress has been concerned for many years about the economic prospects of older buildings. It wants to help prevent the deterioration of distressed economic areas. Congress provided significant tax benefits for rehabilitation of older buldings with the Tax Reform Act of 1976 and the Revenue Act of 1978.(fn1) It increased those benefits with passage of the Economic Recovery Tax Act of 1981 ("ERTA").(fn2)
This article examines the tax incentives now available for real estate rehabilitation. It states the requirements to obtain an investment tax credit ("ITC") for rehabilitation expenditures, including additional requirements for rehabilitations of certified historic structures and buildings located in registered historic districts. Transitional rules for projects started before 1982 and miscellaneous tax aspects of rehabilitations are also discussed, including charitable contributions of building facades, low-income housing depreciation tax benefits and state income tax aspects. Finally, the article presents a checklist of the interrelated steps and requirements for obtaining rehabilitation tax credits.
ERTA provides a credit based upon a percentage of qualified rehabilitation expenditures ("QRE"). The QRE must apply to a qualified rehabilitated building ("QRB")(fn3) so that the taxpayer may claim a credit, as follows:
For QRB's Which AreThe Credit Is
At least 30 years old 15%
At least 40 years old 20%
Certified historic structures 25%
Expenditures that would otherwise qualify for the regular or energy investment tax credits do not qualify for those credits if the rehabilitation tax credits may be claimed.(fn4) Although there is a limitation on the dollar amount of used property qualifying for the investment tax credit, the QRE is treated as expenditures for new property, so there is no such dollar limitation.(fn5)
If the property is sold or otherwise ceases to qualify for the credit within five years from the date the rehabilitated building is placed in service, a portion of the credit previously claimed is recaptured (i.e., it is added to that year's income tax liability). The amount recaptured is the total credit claimed minus the amount earned. The credit is earned over five years at 20 percent per year.(fn6)
A QRB is any building (and its structural components):
1) which has been substantially rehabilitated;
2) which was placed in service before the beginning of rehabilitation and, except for certified historic structures, for which at least thirty years have elapsed between the date the physical work on the rehabilitation began and the date the building was first placed in service; and
3) 75 percent or more of the existing external walls of which are retained in place as external walls in the rehabilitation process.(fn7)
A building is considered substantially rehabilitated if the QRE (as defined below) during the twenty-four-month period ending on the last day of the taxable year exceeds the greater of the adjusted basis of the building, or $5,000.(fn8) For this purpose, the adjusted basis of the building generally is determined as of the beginning of the first day of the twenty-four-month period or on the day after it is acquired, if later.(fn9) The adjusted basis of purchased property is generally its cost, plus any capital improvements, minus allowable depreciation. Special rules apply to determine adjusted basis for property acquired by exchange, gift, inheritance or otherwise.(fn10)
If the project is a phased rehabilitation, the measuring period for determining whether a rehabilitation is substantial is sixty months rather than twenty-four months. A phased rehabilitation must be set forth in architectural plans and specifications completed before the rehabilitation begins and which indicate that the rehabilitation will be completed in phases. Furthermore, it must be reasonable to expect that the rehabilitation will be completed in accordance with the plans.(fn11)
The term "placed in service" means placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity or in a personal activity. The building need not be placed in service for a business or investment purpose for which a depreciation deduction would be allowed.(fn12) However, upon the completion of rehabilitation, the property must be placed in a use that would allow depreciation.(fn13)
The date a building was placed in service can be determined from the Certificate of Occupancy (or equivalent documents). The local building department, assessor's office or other appropriate governmental agency should be able to provide the date the document was issued.
The requirement that at least 75 percent of the external walls be retained in place should be simple to apply. A measurement of the surface area of the external walls before and retained after the rehabilitation provides the basis for calculating the percentage.
A calculation cannot be made to determine whether a leased building has been substantially rehabilitated because the lessee has no adjusted basis in the building. The lessee may not have paid...
To continue reading
Request your trial