Tax credit for historic building

[Veronica Thomas]

Just curious if someone could explain to me how the 20% tax credit works for an old building. My husband and I are looking to invest in a 100 year old 2-story building in the downtown area of our small town. The building is $100,000. We would obviously run things through with our attorney and CPA prior to buying, just need a rough idea how it works.

[Ashish Acharya]

Originally posted by @Veronica Thomas:

Just curious if someone could explain to me how the 20% tax credit works for an old building. My husband and I are looking to invest in a 100 year old 2-story building in the downtown area of our small town. The building is $100,000. We would obviously run things through with our attorney and CPA prior to buying, just need a rough idea how it works.

The property must be substantially rehabilitated. During a 24-month period selected by the taxpayer, rehabilitation expenditures must exceed the greater of the adjusted basis of the building and its structural components or $5,000. The basis of the land is not taken into consideration. It is important to note that any expenditure incurred by the taxpayer before the start of the 24-month period will increase the original adjusted basis. See Treasury Regulation 1.48-12(b)(2).

If the rehabilitation is completed in phases, the same rules apply, except that instead of a 24-month period, a 60-month period is substituted. This phase rule is available only if the taxpayer meets three conditions:

1. There is a written set of architectural plans and specifications for all phases of the rehabilitation. (If the written plans outline and describe all phases of the rehabilitation, this will be accepted as written plans and specifications);
2. The written plans must be completed before the physical work on the rehabilitation begins; and It can be reasonably expected that all phases of the rehabilitation will be completed.
3. The property must be placed in service. See Treasury Regulation 1.46-3(d) for definition of "placed in service." The rehabilitation credit is generally allowed in the taxable year the rehabilitated property is placed in service provided that the building has met the "qualified rehabilitated building" requirements for the 24 month period ending in that taxable year. A qualified rehabilitated building is defined as that which has been substantially rehabilitated and was placed in service as a "building" before the beginning of the rehabilitation (as opposed to a ship, airplane, bridge, etc). See Treasury Regulation 1.48-12(b).

If the taxpayer fails to complete the physical work of the rehabilitation prior to the date that is 30 months after the date the taxpayer filed a tax return on which the credit is claimed, the taxpayer must submit a written statement to the District Director stating such fact and shall be requested to sign an extension to the statute of limitations. See Treasury Regulation 1.48.12(f)(2).

The credit is claimed on Form 3468. Attached to the Form 3468 ( or by way of a marginal notation), the following information must be provided. See Treasury Regulation 1.48-12(b)(2)(viii).

1. The beginning and ending dates of the measuring period selected by the taxpayer.
2. The adjusted basis of the building as of the beginning of the measuring period.
3. The amount of qualified rehabilitation expenditures incurred or treated as incurred during the measuring period.
4. A copy of the final certification of completed work by the Secretary of Interior.
5. If the adjusted basis is determined in whole or in part by reference to the adjusted basis of a person other than the taxpayer, the taxpayer must attach a statement by such third party as to the first day of the holding period, measuring period and adjusted basis calculation.