Rehabilitation Tax Credit – Real Estate Tax Tips

Rehabilitation Credit

The Tax Cuts and Jobs Act, signed December 22, 2017, affects the Rehabilitation Tax Credit for amounts that taxpayers pay or incur for qualified expenditures after December 31, 2017. The credit is a percentage of expenditures for the rehabilitation of qualifying buildings in the year the property is placed in service.

The legislation:

Requires taxpayers take the 20-percent credit ratably over five years instead of in the year they placed the building into service
Eliminates the 10 percent rehabilitation credit for the pre-1936 buildings

A transition rule provides relief to owners of either a certified historic structure or a pre-1936 building by allowing owners to use the prior law if the project meets these conditions:

The taxpayer owns or leases the building on January 1, 2018 and at all times thereafter
The 24- or 60-month period selected for the substantial rehabilitation test begins by June 20, 2018

Notice 2020-58 grants relief for certain section 47 deadlines on account of the COVID-19 pandemic. As part of the relief granted, for taxpayers subject to the transition rule, Notice 2020-58 provides that, if the 24- or 60-month measuring period in which the requisite amount of qualified expenditures is paid or incurred to satisfy the substantial rehabilitation test for a building originally ends on or after April 1, 2020, and before March 31, 2021, the last day of the 24- or 60-month measuring period for a taxpayer to pay or incur the requisite amount with respect to the building is postponed to March 31, 2021.

Reminders for Claiming the Rehabilitation Tax Credit

Form 3468, Investment Credit, is used to claim a variety of investment credits, including the section 47 rehabilitation credit. The instructions to the Form 3468 provide detailed requirements for completing the form.

The form must be attached to the return for each year in which the qualified rehabilitation tax credits are claimed. The form is not required when carrying forward or back net operating losses from a rehabilitation tax credit claimed in another tax year.

Who must file

The instructions require taxpayers claiming a rehabilitation tax credit to file the Form 3468. This includes a shareholder, partner (other than a partner in an electing large partnership), or beneficiary claiming a credit through an S corporation, partnership, or trust.

In addition, if an estate or trust, S corporation, or partnership is the owner of a certified historic structure, it must file a Form 3468 even if the credit is not being claimed by the entity.

A lessor of property may elect to treat the lessee as having acquired the property. The lessee will be treated as the owner of the property required to file Form 3468. The lessor will attach a copy of the election to their return and the lessee will file Form 3468. The lessor also should provide the National Park Service project number to the lessee.

Property or Source of Credit

If the credit claimed for a rehabilitation of a certified historic structure is claimed by the owner of the property the project number assigned by the National Park Service (NPS) must be shown on the owners return. Caution: Do not use state or other identification numbers such as internal identification numbers.

If a lessee is treated as the owner of the property, the lessee should complete Part 1 of the Form 3468 and provide the National Park Service project number.

If the qualified rehabilitation expenditures are passed through to an S corporation, partnership, estate, or trust, then the employer identification number of the pass-through must be shown instead.

Date of Certification of Completed Work

Form 3468 requires the date the NPS Reviewer signed NPS Form 10-168, Part 3, Certification of Completed Work. Caution: Do not use dates for Part 1 or 2, the application date of Part 3 of the NPS Form 10-168, or any other date.

If the final certification hasn’t been received by the time the tax return is filed for a year in which the credit is claimed, a copy of the first page of NPS Form 10-168, Historic Preservation Certification Application (Part 2—Description of Rehabilitation), with an indication that it was received by the Department of the Interior or the State Historic Preservation Officer, together with proof that the building is a certified historic structure (or that such status has been requested). Individuals filing electronically can submit the information with Form 8453. Certification information will be required in the year received.

Carryback or Carryforward

Do not file Form 3468 if the credit is a carryback or a carryforward from another year. Instead report the credit on Form 3800 (and From 8582-CR if required).

Recent Advice on the rehabilitation tax credit:

Safe Harbor

In Historic Boardwalk Hall, LLC. v. Commissioner, 694 F.3d 425 (3d Cir. 2012), cert. denied, U.S., No. 12-901, May 28, 2013, the Third Circuit considered whether an investor’s interest in the success or failure of a partnership that incurred qualifying rehabilitation expenditures was sufficiently meaningful for the investor to qualify as a partner in that partnership. The Third Circuit determined that the investor’s return from the partnership was effectively fixed, and that the investor also had no meaningful downside risk because its investment was guaranteed. The Third Circuit agreed with the Commissioner’s reallocation of all of the partnership’s claimed losses and tax credits from the investor to the principal, holding that “because [the investor] lacked a meaningful stake in either the success or failure of [the partnership], it was not a bona fide partner.

On January 13, 2014, the Internal Revenue Service issued Revenue Procedure 2014-12 which establishes the circumstances under which the Internal Revenue Service will not challenge partnership allocations of § 47 rehabilitation credit by a partnership to its partners.

Tax Exempt Use Property

The rehabilitation tax credit is not allowed for expenditures with respect to property that is considered be tax exempt use property. Under the tax-exempt entity leasing rules of 168(h), the threshold to determine if a disqualified lease exists has been raised to more than 50%.

Alternative Minimum Tax

For qualified rehabilitation credits determined under Internal Revenue Code Section 47 attributable to qualified rehabilitation expenses properly taken into account for periods after December 31, 2007 the alternative tax rules are not applicable. Thus, a taxpayer may use the rehabilitation tax credit to offset his regular tax liability. See the instructions on Form 3468, Investment Credit, for more information.

Place of Filing Notice

If you have claimed a rehabilitation tax credit and the entire project is not completed 30 months after you have claimed the credit and you have not received final certification from the Department of Interior, you must provide written notice to the Internal Revenue Service. The notice must be provided before the last day of the 30 months. The notice as required under Regulation Section 1.48-12(d)(7) is to be mailed to the address shown and you must consent to extend the statute of limitations.

Façade Easements

For information on donating an easement on a historic building see the Conservation Easement Audit Techniques Guide PDF.