Real Estate Investors and Developers – Take Note of Changes to The Rehabilitation Credit
The Tax Cuts and Jobs Act (TCJA) affects both individual and business tax returns in many ways. If you are a real estate investor or developer, the changes to the Rehabilitation Tax Credit could impact you.
What is the Rehabilitation Credit?
The Rehabilitation Credit is an investment tax credit used to encourage real estate investors and developers to restore historic buildings. The credit is a percentage of the amount spent for the rehabilitation of qualifying buildings starting in the year the property is placed in service. It applies to the costs incurred for rehabilitating qualified historic buildings.
- Requires you to take the 20% credit over five years instead of claiming the entire credit in the year you placed the building into service.
- Eliminates the 10% rehabilitation credit for pre-1936 buildings.
- These changes are effective for qualified rehabilitation expenditures starting January 1, 2018.
- Under transition rules, you may be able to apply the pre-TCJA law if you owned or leased the building for all of 2017 and meet other requirements.
- The building must be a certified historic structure listed in the National Register of Historic Places or located in a registered historic district certified by the Secretary of the Interior.
- The building must be depreciable property placed in service before the rehabilitation begins.
- The rehabilitation must be considered “substantial” which means you’ve incurred certain expenditure minimums over a two-year time frame. Qualified expenditures do not include the cost of acquiring or enlarging the building.
How Can You Claim the Rehabilitation Tax Credit?
To claim the credit, work with your tax professional to file Form 3468, Investment Credit. This form is used to claim a variety of investment credits, including the section 47 rehabilitation credit.
The form must be attached to your tax return for each year in which the qualified rehabilitation tax credits are claimed. You’ll need to include specific National Park Service project information for your rehabilitation activity.