10.14 Suspended Tax Credits

If you have tax credits that were barred under the passive activity rules, they may be claimed only in future years when you have tax liability attributable to passive income. However, in the year you dispose of your interest, a special election may be available to decrease your gain by the amount of your suspended credit; see below.

Basis election for suspended credits.

If you qualify for an investment credit (under transition rules) or a rehabilitation credit, you are required to reduce the basis of the property even if you are unable to claim the credit because of the passive activity rules. If this occurs and you later dispose of your entire interest in the passive activity, including the property whose basis was reduced, your gain will be increased by virtue of the basis reduction although you never benefitted from the credit. To prevent this, you may reduce the taxable gain by electing to increase the pre-transfer basis of the property by the amount of the unused credit. The election is made on Form 8582-CR.

EXAMPLE
Dan Brown places in service rehabilitated credit property qualifying for a $50 credit, but the credit is not allowed under the passive loss rules. However, his basis is still reduced by $50. In a later year, Brown makes a taxable disposition of his entire interest in the activity and in the rehabilitation property. Assuming that no part of the suspended $50 credit has been used, Brown may elect on Form 8582-CR to increase his basis in the property by the unused $50 credit.
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