Author: R. Darden Bell, CPA, Tax Senior Associate
Builders who own, develop, or invest in properties that qualify for federal and state rehabilitation tax credits are subject to risk of casualty events that can jeopardize those tax credits. During the rehabilitation phase or occupancy phase of an HRTC project, a casualty event resulting in significant property damage could result in a determination that the structure is no longer historically significant. If such casualty event did occur, the anticipated tax credits may be reduced or lost entirely. There are typically two types of insurance coverage available to builders to avoid such risks – rehabilitation coverage and recapture coverage.
While rehabilitation is ongoing, rehabilitation coverage is generally designed to pay for the loss of the rehabilitation tax credits if a covered casualty results in significant property damage, and as a result of that damage, the amount of tax credit is reduced or totally lost. Rehabilitation coverage will typically pay the lesser of the scheduled tax credit or the amount actually lost due to the determination of reduced qualifying expenditures.
Once the rehabilitated building is placed in service, the tax credit is subject to recapture of the unvested credits at a rate of 20% per year if the building does not remain in commercial use for five years. Upon occupancy, recapture coverage will protect against potential recapture of the credits taken. Recapture coverage is designed to pay loss due to recapture if a covered casualty results in significant property damage, and as a result of that damage, the IRS and/or the state agency disqualifies all or part of the tax credit taken. Recapture coverage typically pays the lesser of the scheduled tax credit or the amount recaptured by the IRS or the state agency.
Should you have any questions related to this topic, feel free to contact your Keiter tax professional for further clarification.
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