Rehab Tax Credit Basics
Federal 20 and 10 Percent Rehabilitation Tax Credits
How to Use Rehab Tax Credits
To qualify for either the 20 percent or the 10 percent rehabilitation tax credit, the rehabilitation must be defined as “substantial”. A substantial rehabilitation means that a taxpayer's QREs during a 24-month or 60-month measuring period (for a phased project) must exceed the "adjusted basis" of the building or $5,000, whichever is greater. The adjusted basis is generally defined as the purchase price, minus the cost of the land, plus the value of any capital improvements made since the building acquisition, minus any depreciation already taken. Eligible properties must be income-producing to qualify for rehabilitation tax credits; therefore, owner-occupied residences are not eligible.
To qualify for the 20 percent credit, the rehabilitation must also be certified as conforming to the Secretary’s Standards for Historic Rehabilitation. This entails completing a three-part application process which is reviewed first by the state historic preservation office (SHPO) and then by the National Park Service.
- Part 1 makes the case for National Register property listing or verifies that a property is a contributing structure in a National Register District;
- Part 2 summarizes the scope of the rehabilitation; and
- Part 3 documents that the work has been done as proposed in the approved Part 2.
Virtually all of the rules that apply to the 20 percent rehab credit apply to the 10 percent credit with a few notable exceptions. The 10 percent credit requires no design review at the state or federal level, but there is a “wall test” requiring that three of the original four walls remain intact. The developer simply needs to attach Form 3468 to his/her tax return.
The compliance and recapture period for the federal rehabilitation credits is five years from the date the property is placed in service. Twenty percent of the recapture risk burns off every year.
How Nonprofit Groups Can Use Tax Credits
Nonprofit organizations and public agencies do not pay federal or state income taxes and therefore have no tax liability against which to apply rehabilitation tax credits. Also, many for-profit entities are not in a tax position to make full use of the value of the credit. Fortunately, it is possible to still tap into the value of the rehabilitation tax credit by transferring (or ‘syndicating’) the tax credit to a corporate investor who then uses the tax credit to offset some of its own tax liability.