On May 22, the Internal Revenue Service released proposed amendments to Treasury Regulation 1.47-7 concerning the federal historic rehabilitation tax credit, including coordinating the new five-year period over which the credit may be claimed with other rules for the credit. The proposed regulations provide that, for qualified rehabilitated buildings that have not been owned or leased continuously from January 1, 2018 (QRB), the rehabilitation tax credit is properly determined in the year the QRB is placed in service (PIS) and is allocated ratably 20% per year over the 5-year period, starting with the PIS year.
The amount of the credit is generally 20% of the qualified rehabilitation expenditures (QREs) incurred through the end of the PIS year. However, if the QRB owner claims Section 168(k) bonus first-year depreciation for the QREs, then the credit is 20% of the remaining QREs incurred through the end of the PIS year after reduction for the bonus, first-year depreciation.
For purposes of applying the credit recapture rules, the proposed amendments confirm that the full credit is determined in the PIS year for the QRB. This means that a single five-year recapture period applies to the full amount of the credit starting with the PIS date, rather than applying a separate five-year recapture period to each annual 20% allocation of credit. Similarly, for a QRB that is leased to a lessee that is treated as the owner of the QREs, the full credit amount is determined in the PIS year for the QRB to determine the applicable lessee income inclusion requirement.
The amendments confirm existing practices with respect to the credit, and the amendments are expected to be finalized after the comment period. Tax credit investment and syndication transactions are rewarding but complex, and require significant legal analysis and consideration by counsel experienced in such transactions and the multiple issues involved. Hirschler’s Tax Credit Group counsels owners, developers, lenders and investors daily in the complexities of credit projects, investments and syndication transactions. If you have questions or would like to discuss your project, please contact a member of our highly qualified team.
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