Overview of the Rehabilitation Tax Credit
The rehabilitation tax credit offers an incentive for owners to renovate and restore old or historic buildings. Tax reform legislation passed in December 2017 changed when the credit is claimed and provides a transition rule.
Key Points:
- The credit is 20 percent of the taxpayer’s qualifying costs for rehabilitating a building.
- The credit does not apply to money spent on buying the structure.
- The legislation now requires taxpayers to take the 20 percent credit spread out over five years beginning in the year they placed the building into service.
- The law eliminates the 10 percent rehabilitation credit for pre-1936 buildings.
Transition Rule for Owners
A transition rule provides relief to owners of either a certified historic structure or a pre-1936 building by allowing owners to use the prior law if the project meets these conditions:
Conditions for Using Prior Law:
- The taxpayer owned or leased the building on January 1, 2018, and the taxpayer continues to own or lease the building after that date.
- The 24- or 60-month period selected by the taxpayer for the substantial rehabilitation test begins by June 20, 2018.
How to Claim the Credit
Taxpayers use Form 3468, Investment Credit, to claim the rehabilitation tax credit and a variety of other investment credits.
- Form 3468 instructions include detailed requirements for completing the form.
Important: Always refer to the latest IRS guidance when preparing your tax filings.
Frequently Asked Questions
What is the rehabilitation tax credit?
The rehabilitation tax credit is a federal incentive that allows property owners to claim 20% of the qualifying costs for restoring historic buildings. It encourages the preservation of architectural heritage while stimulating economic development.
Does the credit cover the purchase cost of the building?
No, the rehabilitation tax credit does not apply to expenses related to the purchase of the building. It only covers qualified rehabilitation expenditures used to restore or improve the structure.
How is the 20% tax credit claimed under current law?
The 20% tax credit must now be claimed evenly over five years, beginning in the year the rehabilitated building is placed into service. This change was enacted under the 2017 tax reform legislation.
Are pre-1936 buildings still eligible for the rehabilitation credit?
No, the 10% rehabilitation credit for pre-1936 buildings was eliminated by the 2017 tax reform law. However, a transition rule may allow use of the prior law for certain projects that meet specific conditions.
What form is used to claim the rehabilitation tax credit?
Taxpayers must use IRS Form 3468, Investment Credit, to claim the rehabilitation tax credit. The form’s instructions provide detailed guidance for accurate filing and compliance.