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Expert: Pre-war building investors can tap into tax credit.

Pre-war and other historical buildings conjure up images of character--high ceilings, thick walls, plaster ornamentation and spacious layouts.

They also invoke a highly involved, often costly commitment when it comes to implementing capital improvements. Fortunately, real estate investors can tap into the Building Rehabilitation Tax Credit.

As set forth in the Section 47 of the Internal Revenue Code (IRC), costs incurred to renovate, restore and reconstruct certain buildings, including prewar buildings, may be eligible for the Building Rehabilitation Tax Credit.

The credit is generally 10 percent of costs for non-historic buildings (excluding residential rental properties) placed in service before 1936 or 20 percent for certified historic structures.

Program basics include the following:

Historic Rehabilitation Tax Credit (20 percent credit)

The term "certified historic structure" is defined by IRC Section 47 as any building (and its structural components) which is either listed in the National Register of Historic Places or located in a registered historic district and is certified by the Secretary of the Interior as being of historic significance to the district.

The owner of a rehabilitated building can claim a historic rehabilitation tax credit (20 percent) on a certified historic structure as long as three conditions are met. First, the building must be substantially rehabilitated; second, it must be placed in service as a building before the beginning of the rehabilitation work; and third, it is considered a certified historic structure.

Non-Historic Structure (10 percent credit)

The non-historic structure tax credit (10 percent) may be considered, provided that the building was placed in service before 1936, is used for non-residential rental purposes, has not been physically moved and meets specific internal and external wall retention guidelines.

These guidelines indicate: 50 percent or more of the existing external walls are retained in place as external walls; 75 percent or more of the existing external walls are retained in place as internal or external walls; and 75 percent or more of the existing internal structural framework is retained in place. Buildings that are "certified historic structures" are precluded from taking both the 10 percent non-historic structure tax credit and the 20 percent certified historic structure credit.

"Substantially Rehabilitated"

A building is considered substantially rehabilitated only if the qualified rehabilitation expenditures during the 24-month period selected by the taxpayer--and ending within the taxable year--exceed the greater of the adjusted basis of such building (and its structural components) or $5,000.

The adjusted basis of the building (and its structural components) is determined as the beginning of the first day of such 24-month period, or of the holding period of the building, whichever is later.

If the qualified rehabilitation expenditures do not exceed the above threshold, the rehabilitation will not meet the requirement that the property is substantially rehabilitated.

In the case of any rehabilitation that may reasonably be expected to be completed in phases set forth in architectural plans and specifications completed before the rehabilitation begins, a taxpayer may use a 60-month period rather than a 24-month period.

Qualified Rehabilitation Expenditures

Qualified rehabilitation expenditures with respect to qualified rehabilitated buildings shall be taken into account for the taxable year in which such improvements to the rehabilitated building are placed in service. The term "placed in service" generally means the appropriate work has been completed that would allow for occupancy of either the entire building or some identifiable portion of the building. The term qualified rehabilitation expenditure does not include:

Cost of acquisition--The cost of acquiring any building or interest therein

Enlargements--Any expenditure attributable to the enlargement of an existing building

Tax-exempt use property Expenditures of lessee Any expenditure of a lessee of a building if, on the date the rehabilitation is completed, the remaining term of the lease (determined without regard to any renewal periods) is less than the recovery period as determined under IRC Section 168(c)

Any expenditure with respect to which the taxpayer generally does not use the straight line method over a recovery period,

The rehabilitation tax credit is available to the title holder for the property. For any taxpayer claiming a rehabilitation tax credit, Form 3468 needs to be filed. And if an estate or trust, S corporation or partnership is the owner of the property, that entity must file the 3468. Furthermore, a shareholder, partner (other than a partner in an electing large partnership) or beneficiary claiming a credit through an S corporation, partnership, or trust must also file Form 3468 to claim the credit.

Once the credit is claimed, the owner must hold the building for a full five years after completing the rehabilitation, otherwise they must repay all or a portion of the credit.

The amount to be repaid starts at 100 percent in the first year and reduces by 20 percent per year during the five-year hold period.

At a time when existing buildings with value-add opportunities are attracting investment, the Historic Rehabilitation Tax Credit offers a good incentive for property owners seeking to restore historic buildings.

By Stephen Tuffy

WithumSmith+Brown, PC
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Comment:Expert: Pre-war building investors can tap into tax credit.
Author:Tuffy, Stephen
Publication:Real Estate Weekly
Date:May 10, 2017
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