Federal Rehabilitation Tax Credit

Transcription

1 Federal Rehabilitation Tax Credit Wilmington, NC February 11,2008

2 IRS National Coordinator Colleen Gallagher Bloomington, MN

3 Advice Advice Oral or Written Advice is not binding on the Internal Revenue Service unless requested in accordance with the current Revenue Procedure

4 Private Letter Rulings Request for Formal Opinion First Revenue Procedure of each year Revenue Procedure User Fee Not Binding if Facts Differ

5 Information on the Internet www2.cr.nps.gov/tps/tax/irs.htm Frequently asked questions IRS code and treasury regulations Topical tax briefs

6 Information on the Internet Rehabilitation tax credit real estate tax tips Form 3468 and Instructions Audit Technique Guide

7 SHPOs and NPS and IRS

8 Credit Allowed 20% of the qualified rehabilitation expenditures with respect to any Certified Historic Structure

9 Property Subject to Historic Tax Credit Individually listed on the National Register of Historic Places or Located in a registered historic districted and certified by the National Park Service as contributing to the historic significance of that district

10 Building Is Is Not

11 Certified by the NPS

12 Substantial Rehabilitation Test The amount of expenditures during a 24- month period must exceed adjusted basis Adjusted basis includes expenses incurred prior to the start of the measuring period Measuring period must end sometime during the year the property is completed and/or placed in service If test is met, all expenditures qualify for the credit

13 Construction Period (48 Months) 24-Month Measuring Period Year 1 Year 2 Year 3 Year 4 Basis Placed in Service Basis is original basis plus construction costs to beginning of 24- month measuring period. Rehabilitation tax credit will be based on all costs incurred during construction period.

14 Construction Period (65 Months) 60-Month Measuring Period - Phased Rehabiliation Must be in writing prior to start of project Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Placed in Service Placed in Service Basis Placed in Service Basis is original basis plus construction costs to beginning of 60 -month measuring period. Rehabilitation tax credit will be based on all rehabilitation costs from the beginning. Credit will be claimed as each phase placed in service once the substantial rehabilitation test met..

15 Qualified Rehabilitation Expenditures Definition Renovation Restoration Reconstruction Must be a Substantial > $5,000 or adjusted basis

16 Qualified Rehabilitation Expenditures All Capitalized Building Costs Construction Period Taxes and Interest Architectural Fees Engineering Fees Legal Fees Related to Construction Insurance Fees Related to Construction Reasonable Development Fees Historic Consultants Fee

17 Qualifying Expenditures Walls, Partitions, Floors, Ceiling Permanent Coverings such as Paneling or Tiling Windows and Doors Components of Central Air or Heating Systems Plumbing, Electrical, and Lighting Systems and Fixtures Chimneys, Stairs, Escalators, Elevators Sprinkling Systems, Fire Escapes Other Components related to the Operation or Maintenance of the Building

18 Non-Qualifying Expenditures Acquisition Costs Enlargement, New Addition Costs Landscaping, Parking Lots, Sidewalks, Fences Outside Environmental Cleanup Asbestos Removal is OK Life Safety Improvements are OK Demolition Costs (Building Removal)

19 Non-Qualifying Expenditures Feasibility Studies Marketing Costs Rent Up Costs Operating Deficits Reserves Permanent Financing Syndication Costs

20 Non-Qualifying Expenditures Appliances Furniture Cabinets (if not permanently affixed) Carpeting (maybe) Decks (not park of original building)

21 Whiteco Industries, Inc. v. Commissioner 65 T.C. 664 (1975), 1. Is the property capable of being removed and has it in fact been moved? 2. Is the property designed or constructed to remain permanently in place? 3. Are there circumstance which tend to show the expected or intended length of affixation? 4. How substantial a job is removal of the property and how time-consuming is it? 5. How much damage will the property sustain upon its removal? 6. What is the manner of affixation of the property to the land?

22 Building & Structural Components Cost Segregation Audit Technique Guide article/0,,id=134180,00.html

23 Depreciation Required to use Straight Line Depreciation

24 Who claims the credit? The owner of the property at the date that the property is placed in service

25 Placed in Service Condition or state of readiness Not necessarily the certificate of occupancy

26 Acquiring Property Rules Qualified rehabilitation expenditures can pass to new owner if property was not placed in service If purchase price is at or above previous owners adjusted basis: Buyer can include in its computation of qualified rehabilitation expenditures, the amount incurred before the acquisition

27 Basis Reduction Required Reduce the basis by the full amount of the credit Example: Cost $100,000 Credit $ 20,000 Basis for depreciation $ 80,000

28 Recapture Year 1 100% NO Credit Year 2 80% Year 3 60% Year 4 40% Year 5 20% Year 6 and later 0%

29 Historic Preservation Certification Application Part I: Evaluation of Significance Narrative History Part II: Description of Rehabilitation Description of Proposed Work Part III: Request for Certification of Competed Work Notification of Completion and Request for Certification

30 Late Submission of Certifications Credit is allowable when building is placed in service Part I - Needs to be submitted prior to placed in service date Exception: Building Individually listed on the National Register Note: Simply being in a Historic District does not count

31 Late Submission of Certifications Part II - Should be submitted prior to start of rehabilitation Failure to Summit may Result in Project Changes May Add to Costs in the Long Run Needs to be filed prior to claiming the credit as does National Register Listing

32 Two Separate Processes Historic Application Rehabilitation Certification Application

33 Late Submission of Certifications Part III Failure to Obtain is Fatal to Credit Must obtain within 30 months of claiming the credit or Extend the Statute

34 Place to file if certification not received within 30 months of claiming the credit Where IRS Notice Issued April 7 th, 2003 Provides you file written notice at: IRS Tax Credit Unit Drop 607 P.O. Box 245 Bensalem, PA 19020

35 Non Historic Credit 10% of the qualified rehabilitation expenditures with respect to any Qualified Rehabilitation Expenditures

36 Non-historic Tax Credits Building must be decertified if located in historic district Taxpayer is not allowed to take 10% credit if the building is eligible for the 20% credit Building must have been originally placed in service before 1936 Building must be used for non-residential rental purposes Building must not have been moved after 1936 Wall retention requirements

37 Topical Tax Briefs 1) Façade easement contributions- (temporarily removed) 2) Late submission of the historic preservation certification applications 3) Property leased to a tax exempt entity 4) Use of the rehabilitation tax credit by lessees 5) Rehabilitation tax credit recapture 6) Special allocations 7) Low income housing credit Vs RTC

38 Façade Easement Contribution Charitable Contribution Deduction Amount = FMV of Easement Contribution Results in Recapture Notice CCA

39 Façade Easement Contribution and Pension Protection Act Amount = FMV of Easement All sides including roof must be protected Pictures No Charitable Contribution Deduction if rehabilitation tax credit within 5 years prior to easement $500 fee after February 27, 2007

40 Property Leased to a Tax-Exempt Entity No Credit if subject to a disqualified lease Exception: De minimis Use - 35% or less Ignore Apportion

41 Disqualified Lease Rules Tax Exempt Entity Any part of the property was financed with tax exempt bonds and entity involved in financing Lease terms provide a fixed or determinable purchase price or an option to buy Lease term > 20 years Same lessee uses the property before and after the sale or lease

42 Tax Credit and Lessee Lessee may claim credit if: He incurs cost or Credit is passed through

43 Use of The Credit by a Lessee Lessee may claim the credit if he incurs the cost of the rehabilitation Lease term must be greater than 39 years for non residential 27.5 years for residential Lessees aggregate the expenditures to meet substantial rehabilitation test

44 Use of The Credit by a Lessee Lessee may claim the credit if the Lessor incurs the cost of the rehabilitation and elects to pass the credit through Lessor does not reduce basis Lessee must ratably include credit amount in income Credit Reduced for Short term lease Does not apply if a net lease

45 Special Allocations Partnerships are used to allocate income, gain, loss, or credit General rule: Each partners share of the basis of investment tax credit property will be based on the profit ratio of the partnership

46 Grants and Insurance General Rule Non-taxable NO rehabilitation tax credit with respect to related expenditures