7814 / How is the credit for rehabilitating old buildings and certified historic structures claimed? What other tax considerations apply?

The rehabilitation tax credit is added with certain other credits into the general business credit calculation, and is subject to the general business credit limitation² (see Q 7885).

The passive loss rules generally apply to the rehabilitation tax credit. However, the rehabilitation tax credit is given special treatment under the rental real estate rules. A taxpayer need not actively participate in the rental activity with respect to which the rehabilitation tax credit is taken to obtain the $25,000 rental real estate exemption amount with respect to the credit.³ Also, the $25,000 exemption amount for rental real estate with respect to the rehabilitation tax credit does not begin to phase out until a taxpayer has income in excess of $200,000.⁴ In addition, the $25,000 rental real estate exemption, which is otherwise unavailable with respect to a publicly traded partnership, is available to the extent that the rehabilitation investment credit and the low-income housing credit (see Q 7801) exceed the regular tax liability attributable to income from the partnership⁵ (see Q 8021).

In the case of partnerships (other than certain publicly traded partnerships taxed as corporations (see Q 7728)), generally each partner’s distributive share of any item of income, gain, loss, deduction, or credit will take into account a change in any partner’s interest occurring during the taxable year. However, this general rule may not be applicable to investment tax credits for rehabilitation expenditures since the investment tax credit is not a tax item that accrues ratably over the taxable year. Investment tax credits accrue at the moment the property is placed in service. Thus, partners may be entitled to an allocation of the credit as determined by their interests in the partnership at the time the property is placed in service.⁶

For property placed in service after 1986, the increase in basis resulting from the rehabilitation expenditures must be reduced by 100 percent of the credit for all rehabilitation credits taken.⁷ For property placed in service prior to 1987, the increase in basis resulting from the rehabilitation expenditures was reduced by 100 percent of the credit taken for noncertified historic structures and, generally, for property placed in service in years 1983 through 1986, by 50 percent of the credit taken with respect to a certified historic structure.⁸ The reduced basis is used to compute the cost recovery (depreciation) deduction.

Some or all of the investment credit must be recaptured on early disposition of property for which a credit was taken that reduced tax liability.⁹ (If the credit did not reduce tax liability, the credit carrybacks and carryforwards are adjusted.) There is no recapture if the property was held at least five years after it was placed in service, or if the early disposition was by reason of death or a transfer to a corporation in which gain or loss was not recognized because it was in exchange for stock and the individual was in control of the corporation immediately after the exchange. Recapture is accomplished by adding to tax a percentage of the credit as indicated in the following table:¹⁰

Percentage to be recaptures	If property disposed of before the end of
100% of investment credit.................................	1st year
80% of investment credit...................................	2nd year
60% of investment credit...................................	3rd year
40% of investment credit...................................	4th year
20% of investment credit...................................	5th year

A portion of the rehabilitation tax credit is recaptured if a taxpayer claims a rehabilitation tax credit with respect to a building, and then sells or donates a facade easement with respect to the same property during the rehabilitation credit recapture period.¹¹ See Q 8108 with regard to a charitable contribution of a “facade easement.”

For property placed in service after 1986, if part or all of the credit is recaptured, the basis in property previously reduced on account of the credit is increased by 100 percent of the recapture amount.¹²

For purposes of determining the amount of depreciation recaptured under IRC Sections 1245 and 1250 (see Q 716), the amount of the basis adjustment is treated as a deduction allowed for depreciation except that the determination of how much depreciation would have been taken using the straight line method is made as if no reduction were made in basis for the credits.¹³