Rehabilitation Tax Credit
The Rehabilitation Tax Credit aims to encourage the restoration and preservation of older, historic buildings. Under the Tax Reform Act of 1986, property owners can receive a significant tax benefit by rehabilitating certified historic structures and other qualifying buildings.
Overview
The Rehabilitation Tax Credit offers:
- 20% Tax Credit: For rehabilitating certified historic structures. These are buildings that are listed individually in the National Register of Historic Places or are contributing buildings within a registered historic district.
- 10% Tax Credit: For rehabilitating non-historic buildings placed in service before 1936. These buildings do not have to be certified as historic but must meet certain physical tests for retention.
Conditions and Requirements
Several conditions must be met to qualify for the Rehabilitation Tax Credit:
- 5-Year Holding Period: The property must be held by the owner for at least five years after the rehabilitation is completed. If the property is sold before the end of the 5-year period, a portion of the credit must be recaptured.
- Reduced Tax Basis: The tax basis of the rehabilitated property is reduced by the entire amount of the credit received, affecting future calculations of depreciation and capital gains.
Examples
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Historic Building Rehabilitation: A developer rehabilitates a historic theater listed on the National Register of Historic Places. Expenditures total $1 million. The developer can claim a $200,000 tax credit (20% of $1 million).
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Non-Historic Building Rehabilitation: A business owner rehabilitates a non-historic warehouse built in 1930. The rehabilitation expenditures amount to $500,000. The owner can claim a $50,000 tax credit (10% of $500,000).
Frequently Asked Questions
What type of properties qualify for the Rehabilitation Tax Credit?
Certified historic structures and buildings placed in service before 1936 that meet certain rehabilitation standards.
How is the tax credit calculated?
The tax credit is a percentage of the qualifying rehabilitation expenditures: 20% for certified historic structures and 10% for other qualifying buildings.
What happens if I sell the property within five years?
If the rehabilitated property is sold before five years, a portion of the tax credit must be recaptured proportionally.
Can the tax credit be transferred to someone else?
Typically, the tax credit is non-transferable and must be claimed by the person or entity who carries out the rehabilitation.
How is the tax basis of the property affected?
The tax basis of the property is reduced by the full amount of the Rehabilitation Tax Credit received.
Related Terms
- Certified Historic Structure: A building listed individually in the National Register of Historic Places or contributing within a registered historic district.
- Recapture Period: The period during which certain conditions, if unmet, can result in the recapture of tax credits.
- Tax Basis: The value used to determine gain or loss for property tax purposes and adjusted by the amount of the tax credit received.
Online Resources
- National Park Service - Historic Preservation Tax Incentives
- IRS - Information on Tax Credits for Preservation
- National Trust for Historic Preservation
References
- IRS. (2022). Tax Incentives for Rehabilitating Historic Buildings.
- US Department of the Interior. (2022). Historic Preservation Tax Incentives.
Suggested Books for Further Studies
- “Historic Preservation: An Introduction to Its History, Principles, and Practice” by Norman Tyler, Ted Ligibel, Ilene R. Tyler
- “New Life for Old Buildings: The Advocacy and Management of Historic Rehabilitation” by Wim Wiewel, David C. Perry
- “Historic Preservation: Caring for Our Expanding Legacy” by Michael A. Tomlan
