Historic Tax Credit FAQs

[Julio Gonzalez]

When rehabilitating or investing in the rehabilitation of an eligible historic or non-historic building, you may be able to take advantage of one or both of the historic tax credits: 1) Historic Tax Incentives and 2) Historic Preservation Tax Credits. You can receive a federal income tax credit equal to 20% of the costs associated with rehabilitating the building.

Here are some questions that I am frequently asked in regard to the Historic Tax Credits:

Who can claim the rehabilitation tax credit?

Those generally eligible to claim this tax credit are corporations, trusts and estates, individuals, and shareholders, partners and beneficiaries of a passthrough entity.

What are the requirements to qualify for this credit?

A taxpayer must own a “qualified rehabilitated building” for which they have incurred “qualified rehabilitation expenditures”. A “qualified rehabilitated building is any building:

• Before the beginning of rehabilitation was placed in service as a “building”
• That has been “substantially rehabilitated”
• That is a depreciable property
• Classified as a certified historic structure

When should I claim this credit?

The credit is typically taken in the taxable year in which you place the “qualified rehabilitated building” in service.

Where do I claim this credit on my tax return?

Taxpayers claiming the rehabilitation credit as well as entities that pass through the qualified rehabilitation expenditures (thus not claiming the credit themselves) will utilize Form 3468, Investment Credit.

Does the Tax Cuts and Jobs Act have an impact on the rehabilitation credit?

Yes, taxpayers are now required to take the 20% federal income tax credit ratably over five years rather than in the year the building was placed into service.

What expenditures are considered to be a “qualified rehabilitation expenditure”?

• Costs that are chargeable to a capital account,
• Incurred by the taxpayer,
• Directly associated with the rehabilitation of the building, and
• Are related to depreciable property

What are examples of non-qualified rehabilitation expenditures?

• Costs to acquire the property
• Costs that do not directly relate to the rehabilitation of the building
• Costs associated with enlarging the property
• Interest incurred on the rehabilitation loan
• Sidewalks, landscaping and parking lots

How does the rehabilitation tax credit impact by cost basis?

Yes. The taxpayer should reduce their basis in the building by the amount of the rehabilitation credit.

Are there recapture rules associated with this tax credit?

If the property is disposed of or is no longer classified as an investment credit property within 5 years of receiving the rehabilitation credit. The recapture percentage is on a sliding scale - 100% recapture if disposed of within 1 year of being placed in service, 80% recapture within 2 years, 60% recapture within 3 years, 40% recapture within 4 years, 20% recapture within 5 years, 0% recapture beyond that.

Can the tax credit be carried back or forward?

Yes, the taxpayer can carry the credit back one year and forward 20 years.

When rehabilitating or investing in the rehabilitation of an eligible historic or non-historic building, you may be able to take advantage of one or both of the historic tax credits: 1) Historic Tax Incentives and 2) Historic Preservation Tax Credits. You can receive a federal income tax credit equal to 20% of the costs associated with rehabilitating the building.

Here are some questions that I am frequently asked in regard to the Historic Tax Credits:

Who can claim the rehabilitation tax credit?

Those generally eligible to claim this tax credit are corporations, trusts and estates, individuals, and shareholders, partners and beneficiaries of a passthrough entity.

What are the requirements to qualify for this credit?

A taxpayer must own a “qualified rehabilitated building” for which they have incurred “qualified rehabilitation expenditures”. A “qualified rehabilitated building is any building:

• Before the beginning of rehabilitation was placed in service as a “building”
• That has been “substantially rehabilitated”
• That is a depreciable property
• Classified as a certified historic structure

When should I claim this credit?

The credit is typically taken in the taxable year in which you place the “qualified rehabilitated building” in service.

Where do I claim this credit on my tax return?

Taxpayers claiming the rehabilitation credit as well as entities that pass through the qualified rehabilitation expenditures (thus not claiming the credit themselves) will utilize Form 3468, Investment Credit.

Does the Tax Cuts and Jobs Act have an impact on the rehabilitation credit?

Yes, taxpayers are now required to take the 20% federal income tax credit ratably over five years rather than in the year the building was placed into service.

What expenditures are considered to be a “qualified rehabilitation expenditure”?

• Costs that are chargeable to a capital account,
• Incurred by the taxpayer,
• Directly associated with the rehabilitation of the building, and
• Are related to depreciable property

What are examples of non-qualified rehabilitation expenditures?

• Costs to acquire the property
• Costs that do not directly relate to the rehabilitation of the building
• Costs associated with enlarging the property
• Interest incurred on the rehabilitation loan
• Sidewalks, landscaping and parking lots

How does the rehabilitation tax credit impact by cost basis?

Yes. The taxpayer should reduce their basis in the building by the amount of the rehabilitation credit.

Are there recapture rules associated with this tax credit?

If the property is disposed of or is no longer classified as an investment credit property within 5 years of receiving the rehabilitation credit. The recapture percentage is on a sliding scale - 100% recapture if disposed of within 1 year of being placed in service, 80% recapture within 2 years, 60% recapture within 3 years, 40% recapture within 4 years, 20% recapture within 5 years, 0% recapture beyond that.

Can the tax credit be carried back or forward?

Yes, the taxpayer can carry the credit back one year and forward 20 years.