31.8 Special Tax Credits for Real Estate Investments
To encourage certain real estate investments, the tax law offers the following tax credits:
Low-income housing credit.
Qualifying investors are allowed to claim a tax credit in annual installments over 10 years for qualifying newly constructed low-income housing and certain existing structures that are substantially rehabilitated. The amount of the credit depends on whether the building is new and whether federal subsidies are received. If you are the building owner, you must receive a certification from an authorized housing credit agency on Form 8609. Investors who get their share of the credit from a pass-through entity (from a partnership, S corporation, estate, or trust) generally may claim their credit directly on Form 3800 (General Business Credit) and do not have to complete Form 8586, which otherwise must be used; see the Form 8586 instructions.
Building owners are subject to a 15-year compliance period during which recapture of the credit may be required (on Form 8611) if the building is disposed of or the qualified basis of the building is reduced. Owners must file Form 8609-A for each year of the compliance period.
Rehabilitation credit for pre-1936 buildings or certified historic structures.
On Form 3468, you may claim a 10% tax credit for rehabilitating pre-1936 buildings or a 20% credit for rehabilitating certified historic structures. The credit percentages are higher for buildings in the Midwestern disaster area or Gulf Opportunity Zone; see below.. For both types of rehabilitation credits, you must generally incur rehabilitation expenses of $5,000 or your adjusted basis in the building, whichever is greater.
Court Decision
For purposes of figuring depreciation deductions, you must reduce basis by the full amount of either rehabilitation credit.
Both rehabilitation credits are subject to recapture if you dispose of the property within five years after it was placed in service or you change use of the property within the five-year period so it no longer qualifies for the credit; see Form 4255 for recapture details.
Filing Instruction
Midwestern disaster area and Gulf Opportunity Zone buildings. A higher credit rate is allowed on Form 3468 for pre-1936 buildings and certified historic structures in the Midwestern disaster area and the Gulf Opportunity Zone. In both areas, the credit percentage for a pre-1936 building is increased from 10% to 13% and for a certified historic structure the percentage is increased from 20% to 26%.
Pre-1936 buildings.
The 10% credit for pre-1936 buildings applies only to nonresidential property. A substantial portion of the building’s original structure must be retained after the rehabilitation. At least 75% of the external walls must be intact, with at least 50% kept as external walls. At least 75% of the existing internal structural framework must be kept in place.
Certified historic structure.
A certified historic structure may be used for residential or nonresidential purposes. The National Park Service must certify that a planned rehabilitation is in keeping with the building’s historic status designation for the credit to be available.
In one case, a developer who rehabilitated a certified historic structure and donated a conservation easement to a historic society in the same year was required to base the credit computation on the rehabilitation expenses minus the charitable deduction claimed. If the donation had been made in a later year, a portion of the original credit claimed would be subject to recapture.
Tax credit limitations.
Tax credits for low-income housing and rehabilitating historic or pre-1936 buildings may be limited by passive activity restrictions on Form 8582-CR (Chapter 10) and by tax liability limits for the general business credit on Form 3800 (Chapter 40).
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