Federal Rehabilitation Investment Tax Credits At A Glance

A community's historic buildings are the tangible links with its past. The Federal government encourages the preservation of historic buildings through various means. One of these programs is the program of tax incentives for the rehabilitation of historic and other old buildings. These incentives encourage investment in historic buildings and the revitalization of historic districts.

The Tax Reform Act of 1986 (PL 99-514) established tax incentives for rehabilitation:

• 20% tax credit for the certified rehabilitation of certified historic structures. (These terms are discussed later.)
• 10% tax credit for the rehabilitation of non-historic buildings built before 1936

The Federal historic preservation tax incentives program is jointly administered by the Department of the Interior and the Department of the Treasury. The National Park Service (NPS) acts on behalf of the Secretary of the Interior. The Internal Revenue Service (IRS) acts on behalf of the Secretary of the Treasury. Certification requests for historic buildings are made to the National Park Service through the appropriate State Historic Preservation Officer (SHPO). Approval of projects undertaken for the 20% tax credit, however, is conveyed only in writing by duly authorized officials of the National Park Service. (Note: For a listing of SHPO’s go to the State Historic Preservation Officers Directory)

A tax credit lowers the tax owed. A tax credit differs from an income tax deduction. An income tax deduction lowers the amount of income subject to taxation. A dollar of tax credit reduces the income tax owed by one dollar, regardless of the income level of the recipient. (Note: other provisions of the 1986 Tax Reform Act affect real estate investments in general. See "Claiming the Tax Credit" and other sections below.)

The 20% rehabilitation investment tax credit equals 20% of the amount spent in a certified rehabilitation of a certified historic structure.

The 10% rehabilitation investment tax credit equals 10% of the amount spent to rehabilitate a non-historic building built before 1936.

20% Investment Tax Credit

The 20% rehabilitation investment tax credit applies to any project that the Secretary of the Interior designates a certified rehabilitation of a certified historic structure.

What is a "certified historic structure?"

A certified historic structure is a building that is listed in the National Register of Historic Places (for a current listing: National Register of Historic Places Homepage)

--OR--

a building that is located in a registered historic district and certified as being of historic significance to the district. The "structure" must be a building... not a bridge, ship, railroad car, dam, or any other kind of structure.

Owners of buildings within historic districts must complete Part I of the Historic Preservation Certification Application-- Evaluation of Significance. The owner submits this application to the SHPO. The SHPO reviews the application, and forwards it to the National Park Service (NPS). The NPS then determines whether the building contributes to the historic district. If so, the building is a "certified historic structure." The NPS bases its decision on the Secretary of the Interior's "Standards for Evaluating Significance within Registered Historic Districts." These Standards are printed elsewhere in this document.

Buildings individually listed in the National Register of Historic Places are already certified historic structures. Owners of these buildings need not complete the Part I application.

Property owners unsure if their building is in the National Register or if it is located in a registered historic district should contact their SHPO. Each SHPO has complete records of buildings and districts listed in the National Register of Historic Places, as well as state and local historic districts that may also qualify as "registered historic districts." The SHPO can also assist anyone wishing to list a building or district in the National Register.

Owners of buildings that are not yet listed in the National Register of Historic Places or located in districts that are not yet registered historic districts may use the Historic Preservation Certification Application, Part 1, to request a preliminary determination of significance from the National Park Service. Such a determination allows the owner to proceed with the rehabilitation project while the process of nominating a building or a district continues. Preliminary determinations, however, are not binding and become final only when the building or the historic district is listed in the National Register.

(Note copies of the Certification Application forms may be downloaded via FTP for WordPerfect or Word and instructions are available on the NPS web site)

A certified rehabilitation is a rehabilitation of a certified historic structure that is consistent with the historic character of the property and, where applicable, the district in which it is located.

Owners seeking certification of rehabilitation work must complete Part 2 of the Historic Preservation Certification Application -- Description of Rehabilitation. (Lessees may also apply if their lease is 27.5 years for residential property or 39 years for nonresidential property-) The owner submits the application to the SHPO. The SHPO reviews the application and forwards it to the NPS.

The NPS reviews the rehabilitation project for conformance with the "Secretary of the Interior's Standards for Rehabilitation." These Standards are printed elsewhere in this document.

After the rehabilitation is completed, the owner submits Part 3 of the Historic Preservation Certification Application--Request for Certification of Completed Work, to the SHPO. The SHPO forwards the application to the NPS, which evaluates the completed work against the work as described in the Part 2-- Description of Rehabilitation. Only completed projects found to meet the Standards for Rehabilitation are designated "certified rehabilitations" for purposes of the investment tax credit. Owners may submit Part 2 and Part 3 together, if they apply after the work is completed. However, the NPS strongly encourages applicants to apply before they begin work.

The NPS charges a fee for reviewing applications, except for rehabilitation under $20,000. The fee for review of proposed or ongoing work is $250. This fee for preliminary review is deducted from the final fee (if a review of proposed or ongoing work has been made prior to submission of the Request for Certification of Completed Work). Fees for review of completed rehabilitations appear below. In general, each rehabilitation of a structure is considered a separate project when computing the amount of the fee.

To be eligible for the 20% tax credit for rehabilitation, a project must also meet the following basic tax requirements of the Internal Revenue Code:

• the building must be a depreciable building. That is, it must be used in a trade or business or held for the production of income. It may be used for offices, for commercial or industrial enterprises, or for rental housing. It may not, however, be an owner-occupied residence.
• the rehabilitation must be a substantial rehabilitation. The rehabilitation costs must exceed $5,000 or the adjusted basis of the building--whichever is greater. (The adjusted basis is generally the purchase price, minus the cost of land, plus improvements already made, minus depreciation already taken.)
• the rehabilitation costs must be incur-red within 24 months (or within 60 months for phased projects, if architectural plans and specifications are completed before the rehabilitation begins).

Over 25,000 projects have been approved for the historic preservation tax credit. Observing the following points will make approval of your project more likely:

• Apply as soon as possible--preferably before beginning work. Consult with the SHPO as soon as you can. Read carefully the program application, regulations, and any other information the SHPO supplies. Submit your application as soon as possible. Whenever possible, wait until the project is approved in writing by the National Park Service before beginning work.
• Photograph the building inside and outside--before and after the project. "Before" photographs are especially important. Without them, it is often impossible for the National Park Service to approve a project.
• Read and follow the Secretary of the Interior's Standards for Rehabilitation.
• Once you have applied, let the SHPO and the NPS know of any changes in the project.

The tax credit must be claimed (on IRS form 3468 and instructions) for the tax year in which the rehabilitated building is placed back in service. For phased projects, the tax credit may be claimed before completion of the entire project on the basis of "qualified progress expenditures" if construction is planned for two or more years.

The IRS requires that the final NPS certification of completed work be filed with the tax return claiming the tax credit If final certification has not yet been received when the taxpayer files the tax return claiming the credit, a copy of the first page of the Historic Preservation Certification Application--Part 2, should be filed with the tax return. The copy of the application filed should show evidence that it has been received by either the SHPO or the NPS (date-stamped receipt or other notice is sufficient). In such cases, the taxpayer has up to 30 months after the date of the tax return claiming the tax credit to submit final certification of the rehabilitation to the IRS.

The owner must hold the building for five years after the rehabilitation. If the owner sells the building within the five-year period, 20% of the credit is recaptured for each year remaining.

The NPS may inspect a rehabilitated property at any time during the 5-year period. It may revoke certification if work was not done as described in the Historic Preservation Certification Application, or if unapproved alterations were made.

Rehabilitated property is depreciated using the straight-line method over 27.5 years for residential property and over 31.5 years for nonresidential property. The depreciable basis of the rehabilitated building must be reduced by the full amount of the tax credit claimed. Alternatively, rehabilitated property may be depreciated using the 40-year straight-line method (also with a full adjustment to basis by the amount of the credit). The difference between depreciation deductions using the 40-year straight-line and the 27.5 or 31.5-year straight-line methods is treated as an item of tax preference under the Tax Reform Act of 1986.

The 10% investment tax credit is available for the rehabilitation of non-historic buildings built before 1936.

As with the 20% investment tax credit, the 10% credit applies only to buildings--not to ships, bridges or other structures. The rehabilitation must be a substantial rehabilitation, exceeding either $5,000 or the adjusted basis of the property, whichever is greater. And the property must be income- producing.

Unlike the 20% tax credit, however, the 10% credit does not apply to buildings rehabilitated for any residential uses, whether for rental residences or the owner's personal residence.

Furthermore, projects undertaken for the 10% credit must meet a test governing the retention of external walls and internal structural framework:

• at least 50% of the building's existing walls must remain in place as external walls, and
• at least 75% of the building's existing external walls must remain in place as either external or internal walls, and
• at least 75% of the building's internal structural framework must remain in place.

The 10% investment tax credit applies only to non-historic buildings built before 1936. The 20% investment tax credit applies only to certified historic structures. The two credits are exclusive. Only one applies to a given project. Which credit applies depends on the building--not on the owner's preference.

Owners of buildings listed on the National Register of Historic Places may not take the 10% credit. Owners of buildings located in registered historic districts may claim the 10% credit only if they file Part I of the Historic Preservation Certification Application with the National Park Service and receive a determination that the building does not contribute to the district.

Section 6 of the Tax Treatment Extension Act of 1980 (IRC Section 170) established income and estate tax deductions for charitable contributions of partial interests in historic property (i.e., principally easements). The Tax Reform Act of 1986 retains these provisions. Generally, the IRS considers that a donation of a qualified real property interest to preserve a historically important land area or a certified historic structure meets the test of a charitable contribution for conservation purposes. For purposes of the charitable contribution provisions only, a certified historic structure need not be depreciable to qualify, may be a structure other than a building and may also be a portion of a building such as a facade, if that is all that remains, and may include the land area on which it is located.

The IRS definition of historically important land areas includes:

• independently significant land areas, including any related historic resources that meet National Register Criteria for Evaluation;
• land areas within registered historic districts, including buildings, that contribute to the significance of the historic district; and
• land areas adjacent to a property individually listed in the National Register of Historic Places (but not within a historic district) where physical or environmental features of the land area contribute to the historic or cultural integrity of the historic property.

A number of States offer tax incentives for the rehabilitation of historic buildings. Check with the SHPO in your State. Requirements for State incentives may differ from those outlined here.

(Note: The state of Texas provides for sales and property tax incentives for the rehabilitation of historic buildings. Check with your local tax assessor, landmark commission, or planning department for information on local tax incentives or tax abatements for historic buildings.)

The Tax Reform Act of 1986 (IRC Section 42) also established a tax credit for acquisition, construction, or rehabilitation of low income housing. The credit is 9% per year for 10 years for each unit acquired, constructed, or rehabilitated without other federal subsidies and 4% for 10 years for units involving federal subsidies or tax-exempt bonds. Units must meet tests for cost per unit and number of units occupied by individuals with incomes below area median income. The law sets a 15-year compliance period. Each state has its own requirements for obtaining and using the Low Income Housing Tax Credits (LIHTC), credits are allocated by the State Housing Credit Agencies.

(Note: In Texas the LIHTC program is administered by the Texas Department of Housing and Community Affairs, P.O. Box 13941, Austin Texas 78711-3941, phone 512/475-3800. Generally, LIHTC submittal requirements are released in February, applications are submitted in the spring, and the tax credits awarded by July 31 of each year. For more information Texas Department of Housing and Community Affairs –OR— Texas Low Income Housing Tax Credit Directory)

The following Standards govern whether buildings within a historic district contribute to the significance of the district. Owners of buildings that meet these Standards may apply for the 20% investment tax credit.

1. A building contributing to the historic significance of a district is one which by locations design, setting, materials, workmanship, feeling and association adds to the district's sense of time and place and historical development.
2. A building not contributing to the historic significance of a district is one which does not add to the district's sense of time and place and historical development; or one where the integrity of the location, design, setting, materials, workmanship, feeling and association has been so altered or has so deteriorated that the overall integrity of the building has been irretrievably lost.
3. Ordinarily buildings that have been built with the past 50 years shall not be considered to contribute to the significance of a district unless a strong justification concerning their historical or architectural merit is given or the historic attributes of the district are considered to be less than 50 years old.

(Note: the National Park service has a useful Checklist for Rehabilitating Historic Buildings )

Secretary of the Interior's Standards for Rehabilitation

Rehabilitation projects must meet the following Standards to qualify as "certified rehabilitations" eligible for the 20% investment tax credit. The Standards are applied to projects in a reasonable manner, taking into consideration economic and technical feasibility.

The Standards apply to historic buildings of all materials, types, and sizes. They apply to both the exterior and the interior of historic buildings. The Standards also encompass related landscape features and the building's site and environment as well as attached, adjacent or related new construction.

• A property shall be used for its historic purpose or be placed in a new use that requires minimal change to the defining characteristics of the building and its site and environment.
• The historic character of a property shall be retained and preserved. The removal of historic materials or alteration of features and spaces that characterize a property shall be avoided.
• Each property shall be recognized as a physical record of its time, place and use. Changes that create a false sense of historical development, such as adding conjectural features or architectural elements from other buildings, shall not be undertaken.
• Most properties change over time; those changes that have acquired historic significance in their own right shall be retained and preserved.
• Distinctive features, finishes, and construction techniques or examples of craftsmanship that characterize a property shall be preserved.
• Deteriorated historic features shall be repaired rather than replaced. Where the severity of deterioration requires replacement of a distinctive feature, the new feature shall match the old in design, color, texture, and other visual qualities and, where possible, materials. Replacement of missing features shall be substantiated by documentary, physical, or pictorial evidence.
• Chemical or physical treatments, such as sandblasting, that cause damage to historic materials shall not be used. The surface cleaning of structures, if appropriate, shall be undertaken using the gentlest means possible.
• Significant archeological resources affected by a project shall be protected and preserved. If such resources must be disturbed, mitigation measures shall be undertaken.
• New additions, exterior alterations, or related new construction shall not destroy historic materials that characterize the property. The new work shall be differentiated from the old and shall be compatible with the massing, size, scale, and architectural features to protect the historic integrity of the property and its environment.
• New additions and adjacent or related new construction shall be undertaken in such a manner that if removed in the future, the essential form and integrity of the historic property and its environment would be unimpaired.

The Tax Reform Act of 1986 affected the way in which real estate investments are treated. These changes may affect how individual taxpayers can use the income tax credit for rehabilitation. They are discussed briefly below. However, readers are advised to seek advice from an accountant, tax attorney or other professional familiar with these provisions of the Internal Revenue Code.

The Tax Reform Act of 1986 divides income into three categories: "active" (salaries, wages, business income), "portfolio" (interest and dividends), and "passive" (including income from rental real estate). Generally, the law bars individuals (but not corporations) from using losses and credits from passive income sources to avoid taxes on active or portfolio income. Losses and credits from passive income sources are allowed only against other passive income. There are two exceptions to this general rule.

The first exception applies to taxpayers who "actively participate" in real estate. Under the "passive loss miles" for rental real estate, such taxpayers may take up to $25,000 in losses annually from rental properties. This $25,000 annual limit on losses is reduced for individuals with incomes between $ 1 00,000 and $150,000 and eliminated for those with incomes over $150,000.

Under the "passive credit exemption," tax credits from rental property can be used to offset the tax owed on up to $25,000 of "active income." This exemption is not a $25,000 credit, but rather the computation of a credit on the tax on up to $25,000 of "active" income. Furthermore, the $25,000 amount is first reduced by losses from rental real estate allowed under the "active participation" rule described above. The passive credit exemption is phased out in the same manner as the "passive loss" exemption.

However, taxpayers who undertake certified rehabilitations of certified historic structures or who undertake low-income housing credits need not "actively participate" in order to qualify for the Passive Credit Exemption. Thus, limited partners--not just the owner or the general partner--may also take advantage of the 20% investment tax credit for historic preservation. (This is not the case with the 10% investment tax credit for buildings built before 1936, however.) This exemption is reduced for individuals with incomes between $200,000 and $250,000. It is phased out entirely for those with incomes over $250,000.

What these provisions mean, in general, is that many taxpayers may not be able to use in one year all of the tax credits earned in a certified rehabilitation project. A taxpayer in the 28% income tax bracket, for example, could apply only $7,000 of tax credits earned to taxes owed for a particular year (28% tax rate x $25,000 passive credit exemption = $7,000). Taxpayers, however, may carry over the unused tax credit to succeeding years.

For more information on tax incentives for historic preservation, contact the NPS Office listed below or your State Historic Preservation Officer (SHPO) . Completed applications and documentation are to be sent directly to the SHPO office. Available material includes:

• "The Historic Preservation Certification Application (a 3-part form: Part I--Evaluation of Significance; Part 2--Description of Rehabilitation; Part 3--Request for Certification of Completed Work).
• Department of the Interior, National Park Service, regulations on "Historic Preservation Certifications." [36 CFR Part 67].
• Department of the Treasury, Internal Revenue Service, regulations on "Investment Tax Credit for Qualified Rehabilitation Expenditures." [26 CFR Part I and 6021.
• Publications on the preservation of historic buildings.

(Note: Caring for the Past A Catalog of Historic Preservation Publications developed by the National Park Service Technical Preservation Services). This comprehensive listing of sales publications includes the popular Preservation Briefs series, Preservation Tech Notes, and Guidelines for Rehabilitating Historic Buildings.

Texas SHPO:
Texas Historical Commission
P.O. Box 12276
Austin, Texas 78711-2276

(512) 463-6094

Heritage Preservation Services
Division of Architecture
National Park Service
P.O. Box 3712
Washington, D.C. 20013-7127

(202) 343-9566

The following questions and answers are provided in order to better illustrate the eligibility requirements for claiming the Rehabilitation Tax Credit:

The property must be substantially rehabilitated. During a 24-month period selected by the taxpayer, rehabilitation expenditures must exceed the greater of $5,000.00 or the adjusted basis of the building and its structural components. The basis of 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 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 two conditions:

• there is a written set of architectural plans and specifications for all phases of the rehabilitation; and
• it can be reasonably expected that all phases of the rehabilitation will be completed.

The property must be placed in service. See Treasury Regulation 1.46-3(d). The rehabilitation tax 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 that taxable year. See Treasury Regulation 1.48-12(f)(2).

If the taxpayer fails to complete the physical work of the rehabilitation prior to the date that is 30 months after the date that the taxpayer filed a tax return on which the credit is claimed, the taxpayer must submit a written statement of such fact to the District Director and shall be requested to sign an extension to the statute of limitations. See Treasury Regulation 1.48-12(f)(2).

What relationship exists between the "substantially rehabilitated" requirement and the "placed in services requirement?

Generally speaking, the 24-month measuring period ends sometime during the year in which the property is placed in service. When comparing the taxpayer's qualified rehabilitation expenses to its basis, the expenses accrued over a 24-month period must end with or within the tax year the credit is being claimed. Exceptions to this rule exist if the building is never taken out of service during the rehabilitation. Then only the substantial rehabilitation test must be met. See Treasury Regulation 1.49-12(f)(2).

In an elected 60 month phased rehabilitation, the court has ruled that the tax credit could not be claimed on assumed eligibility. The substantial rehabilitation test must be met. See "Ford vs. U.S. 93-1 USTC.

For the substantial rehabilitation test, the date to determine adjusted basis of the building is determined as on the first day of the 24-month measuring period or the first day of the taxpayer’s holding period of the building, whichever is later. Generally the holding period is deemed to begin the day after acquisition.

Adjusted basis of a building is the cost of the property (excluding land) plus or minus adjustments. The County Assessor's office would be able to provide a building to land value ratio. Increases to basis includes capital improvements, legal fees incurred in perfecting title, zoning costs, etc. Decreases to basis include deductions previously allowed or allowable for depreciation. See Treasury Regulation 1.48(b)(2)(iii).

There exists a basis reduction for rehabilitated buildings. Generally, after 1985, the basis of rehabilitated buildings, including certified historic structures, must be reduced by 100% of the rehabilitation credit earned, regardless of whether the credit is used or carried forward. The reduction amount is added back if the credit is recaptured. See Treasury Regulation 1.48-12(e).

The rehabilitation tax credit is available only if the taxpayer uses the straight-line MACRS depreciation method or the straight-line MACRS alternative depreciation system. Current recovery period is 27.5 years for residential rental property and 39 years for non-residential real property. The mid-month convention rule applies. See Treasury Regulation 1.48-12(c)(8).

Any expenditures incurred in connection with the rehabilitation of a qualified building that are properly chargeable to a capital account. These expenditures do not include:

1. Costs of acquiring the building or any interest therein.
   See Treasury Regulation 1.48-12(c)(9).
2. Enlargement costs which expand the total volume of the existing building. Interior remodeling which increases floor space is not considered enlargement.
   See Treasury Regulation 1.48-12(c)(10).
3. Expenditures attributable to work done to facilities related to a building, such as parking lots, sidewalks, and landscaping.
   See Treasury Regulation 1.48-12(c)(5).
4. New building construction costs.
   See Treasury Regulation 1.48-12(b)(2)(B)(iv).

The rehabilitation tax credits are subject to recapture. No recapture is required after five years.

The amount of such recapture is reduced by 20% for each full year that elapses after the property is placed in service. Thus there is a 100% recapture if the property is disposed of less than one year after the property is first placed in service; and 80% recapture after one year; 60% after two years, 20% after four years. See Code Section 47(a)(5).

An allocation must be made between the business and non-business portions of the qualified rehabilitation expenditures. The allocation is generally based on square footage. The percentage of expenditures representing the non-business portion is subtracted from the qualified rehabilitation expenditures eligible for the tax credit. The "substantial rehabilitation " test and "placed in service" test apply to the business portion.

If all of the credit cannot be used, the excess can be carried back three years and then forward fifteen years. Form 3468 is used to figure the rehabilitation tax credit in the current year and Form 3800 is used to reflect the carryback/carryforward amount.

See Internal Revenue Code Section 39(a).

The seller can pass the credit to a buyer, provided that no one has claimed a rehabilitation tax credit for the rehabilitation costs and the building acquired was not used after the seller incurred the expenditures and before the date of acquisition. See Treasury Regulation 1.48-12(c)(3).

The amount of expenditures that are treated as incurred by the buyer is the lesser of-

• the amount of expenses actually incurred before acquisition or
• an allocable portion of the cost of the property if it is bought for an amount less than the rehabilitation expenses actually incurred '
  See Treasury Regulation 1.48-12(c)(3)(ii)(B).

The rehabilitation tax credit is 20% of the qualified rehabilitation costs incurred before and during, but not after, a taxable year for which the credit is claimed, that is, the year in which the property is placed in service. Costs incurred thereafter do not qualify for the credit It is important to distinguish between qualified rehabilitation costs incurred during a 24-month measuring period and the costs incurred from the start of the project and up through the end of the taxable year in which the credit is claimed.

It is possible that an additional rehabilitation tax credit would be allowable on a new project within the same property as long as that project involves a portion of the building that was not placed in service.

The investment credit at-risk rules apply after 1986 to the rehabilitation tax credit since those rules apply to property used in a real estate activity. See Internal Revenue Code Section 46(C)(8)(B) and Code Section 465(C)(3)(D).

The passive activity loss limitations of Code Section 469 are effective generally for tax years beginning after 1986 and limit credit derived from passive activities. In the case of credits derived from rental real estate activities, a taxpayer may use the credit up to a deduction equivalent amount of $25,000 per year. The deduction equivalent of the credit is defined as the amount which, if allowed as a deduction, would reduce the regular tax liability of the taxpayer by an amount equal to such credits. Thus, assuming a 28% tax rate, the $25,000 deduction equivalent would be 28% of 25,000, or $7,000 in credits. The availability of the credit attributable to rental real estate activities is phased out by reducing the $25,000 deduction equivalent by 50% of the amount by which the taxpayer’s adjusted gross income (AGI) exceeds $200,000. Thus taxpayers whose AGI is over $250,000 would not be able to use the rehabilitation tax credit.

A taxpayer cannot claim a 10% rehabilitation tax credit on a building which is certified to contribute to the significance of a National Register Historic District or which is listed individually in the National Register of Historic Places. For these properties only the 20% credit is allowable. An income producing building which is at least 50 years old and is within a National Register historic district may be certified as not contributing to the significance of the district and thereby qualify for the 10% credit (see page 2 of the instructions for Part I of the Historic Preservation Certification Application).

Property not qualifying as a certified historic structure is ineligible for the 10% rehabilitation tax credit if it is used as a lodging facility after the rehabilitation is complete (this does not apply to hotels, motels, and "bed & breakfasts" which cater to transient clientele). Consequently, a rehabilitated property used as an apartment is ineligible for the 10% credit. See Treasury Regulation 1.48- 1 (h)(1)(i) and (2)(ii).

A building that has been physically moved is ineligible for the 10% rehabilitation tax credit.

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

1. The beginning and ending dates for 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 rehabilitation expenditures incurred or treated as incurred during the measuring period.
4. Copy of the final certification of completed work by the Secretary of the Interior.
5. If the adjusted basis is determined in whole or 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.

If the lease term is greater than the recovery period determined under Internal Revenue Code Section 168(c), i.e. 39 years for nonresidential real property, the lessee can claim the rehabilitation tax credit on qualified rehabilitation expenditures. Also see Samuel G. and Hazel P. Eubanks, et al, vs. Commissioner, 59 TCM 529.

Tax exempt use property is defined in Internal Revenue Code Section 168(h)(1) as that portion of the property leased to a tax exempt entity in a disqualified lease. A disqualified lease occurs when -

1. part of all of the property was financed directly or indirectly by an obligation in which the interest is tax exempt under Internal Revenue Code Section 103(a) and such entity (or related entity) participated in such financing,
2. under the lease there is a fixed or determinable purchase price or an option to buy,
3. the lease term is in excess of 20 years, or
4. the lease occurs after a sale or lease of the property and the lessee used the property before the sale or lease. See Internal Revenue Code Section 168(h)(1)(B)(ii).

The taxpayer must request on or before the date the property was placed in service a determination from the Department of the Interior that such building is a historic structure and the Department of the Interior must then determine that the building is a certified historic structure. See Treasury Regulation 1.48-12(d)(1). Accordingly, if Part I of the application was not submitted prior to when the property was placed in service, the taxpayer would not be eligible for the tax credit.

The Texas Historical Commission can assist you with questions on Part I (evaluation of historical and architectural significance), Part 2 (architectural and other rehabilitation work), and Part 3 (request for certification of completed work) of the Historic Preservation Certification Application, and with questions on listing buildings in the National Register of Historic Places.

If you have technical questions concerning taking the Rehabilitation Tax Credits (IRC Section 47 and Treas. Reg. 1.48-12), please contact one of the following IRS representatives. These representatives are knowledgeable about the rehabilitation tax credit program, but your local IRS office may not be aware of the program due to a high turnover in personnel.

ST. PAUL DISTRICT OFFICE, INTERNAL REVENUE SERVICE

Mark Primoli

Buzz Mroszak

612/373-5139

Internal Revenue Service
St. Paul District Office
Stop 4114
EG; 1114
6040 Earle Brown Drive
Brooklyn Center, Minnesota 55430

mdg@mgaia.com
This page last updated on 05/18/01