Real Estate Investors and Developers: Are You Aware of the Historic Rehabilitation Tax Credit?
Posted on 02.02.18
Real estate investors and developers will want to take note of the changes to the Historic Rehabilitation Tax Credit as a result of the recently passed Tax Cuts and Jobs Act (TCJA).
Under IRC Section 47, a credit exists for restoring qualified historical buildings. The credit for restoring a certified historic structure is 20% of the qualified rehabilitation expenditures incurred on income producing property. Often, states will provide historic rehabilitation credits in conjunction with the federal credit. For example, Virginia offers a 25% credit on qualified historic structure, which also includes non-income producing property such as a personal residence. The federal tax credit is overseen by the National Park Service (NPS) while the Virginia tax credit is managed by the Virginia Department of Historic Resources (DHR). It is important to know that qualified expenditures and processes may differ between DHR and NPS. For example, Virginia requires a CPA to audit and certify the qualified rehabilitation expenses when they exceed $100,000. In addition, there are limitations and floors on the timing and amount of qualified rehabilitation expenditures claimed.
Changes to IRC Section 47
IRC Section 47 was amended by the TCJA in several significant areas. The main change enacted by the TCJA does not materially affect how the 20% credit is obtained, instead it impacts how the credit is used. Under the old law the credit could be carried back one year and any unused portion could be carried forward 20 years. Under the TCJA the carryback of the credit has been repealed. Additionally, the credit must be taken ratably over 5 years beginning in the year the rehabilitated building is placed in service. An additional change is that the 10% credit for qualified expenditures on buildings placed in service before 1936 (even though not “historic”) has been repealed. There are transitional rules allowing the old rules to apply for qualified rehabilitations beginning no later than 180 days after December 22, 2017 (June 20, 2018).
An interesting note for properties being rehabilitated in Virginia is that often times the amount of expenditures required to qualify as a substantial rehabilitation will also make the project eligible for a grant from the Virginia Department of Housing and Community Development. If the property is for commercial use and located within certain designated zones (Enterprise Zones) throughout the state, a grant is available of up to $100,000 or $200,000 if certain requirements are met. However, there is a fixed amount of funding available for the grant and will be prorated among applicants. The grant applications were prorated at 73 cents per dollar requested in 2016.
Read more about Virginia Real Property Investment Grants and how to take advantage.
Additional Tax Planning Resources:
- AMT Changes to Individuals and Businesses
- Tax Reform Bringing Changes to Business Tax Planning
- Tax Cuts and Jobs Act: What you need to know about the Estate, Gift & Trust Provisions
- IRS Directives for International Examiners on Important Transfer Pricing Issues
- Changes to Capital Gains Taxes in 2018
- 529 Plans: Benefits and New Tax Incentives
- New Tax Law: What you need to know