Rehabilitation Tax Credit (Portfolio 586)

Tax Management Portfolio 586 T.M., Rehabilitation Tax Credit, provides an in-depth analysis of the §47 tax credit (Credit) for the rehabilitation of certified historic structures and certain other buildings originally placed in service before 1936. To view this Portfolio, visit Bloomberg Tax for a free trial.

 

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Description

Tax Management Portfolio 586 T.M., Rehabilitation Tax Credit, provides an in-depth analysis of the §47 tax credit (Credit) for the rehabilitation of certified historic structures and certain other buildings originally placed in service before 1936. A 20% credit is available for qualified rehabilitation expenditures incurred in connection with the rehabilitation of a certified historic structure, and a 10% credit may be taken for qualified rehabilitation expenditures incurred with respect to rehabilitation of certain other buildings placed in service before 1936. To qualify for the Credit, a qualified rehabilitated building must have been substantially rehabilitated and initially placed in service before the beginning of the rehabilitation. In addition, buildings qualifying for the 10% credit must meet certain external and internal wall requirements. A certified historic structure must either be listed in the National Register of Historic Places (National Register) or be located in a registered historic district.

This Portfolio discusses in detail the definitions and technical requirements to qualify for and claim the Credit. It discusses the pass-through election that permits a lessee to claim the Credit, and required basis reductions (or fictional income) for property for which a Credit is claimed.

In addition, it discusses limitations on the use of the Credit and recapture. Finally, the Portfolio discusses typical transaction structures and use of the Credit in conjunction with other tax benefits, as well as analyzes the important case of Historic Boardwalk, LLC v. Commissioner, which has dramatically changed the way in which Credit transactions are structured.

This Portfolio may be cited as Mount, 586 T.M., Rehabilitation Tax Credit.

Authors

Steven F. Mount

Steven F. Mount, B.A., Muskingum College (1976); J.D., Harvard Law School (1979); admitted to bar, Massachusetts (1979), New York (1982), Ohio (1986), U.S. Tax Court (1989); panelist, Novogradac Historic Tax Credit and New Markets Tax Credit Conference series; member, National Association of Real Estate Investment Trusts; Advisory Board Member, Bloomberg Bureau of National Affairs, Inc.; author of 585 T.M., New Markets Tax Credit; author of several articles on REITs and other issues; recognized in The Best Lawyers in America since 2006; recognized in Ohio Super Lawyers.


Table of Contents

Detailed Analysis
I. Introduction
A. History
B. Importance of the Rehabilitation Credit in Preserving Historic Buildings
C. Overview of Credit and Role of the Internal Revenue Service
D. Overview of Certification Process and Role of the National Park Service and State Historic Preservation Office
II. Definitions
A. Importance of Definitions
B. Definition of Qualified Rehabilitated Building
1. Definition of Rehabilitation
2. Must Be a Building
3. Building Must Be Substantially Rehabilitated
C. Definition of Qualified Rehabilitation Expenditures
D. Definition of Certified Rehabilitation
E. Definition of Certified Historic Structure
F. Section 38 Property
III. Amount and Timing of Credit
A. Amount of Credit
B. Timing of Credit and Placed in Service Test
C. Progress Expenditures
IV. Pass-Through of Credit to Lessee
A. Basis and Reasons for Pass-Through of Credit
B. Requirements for Pass-Through
1. Election Only for New Section 38 Property
2. Depreciable Property with a Life of at Least Three Years
3. Limitations on Certain Persons
C. Short-Term Lease Rules
D. Election
V. Basis Adjustment and §50(d) Income
A. Basis Reduction
B. Partnership and S Corporation Basis
C. Section 50(d) Income of Lessee
VI. Limitations on Use of Credit
A. At-Risk Rules
1. In General
2. Increases or Decreases in Nonqualified Nonrecourse Financing
3. Deferred Development Fee
4. Pass-Through At-Risk Rules
B. No Limitation Based on Amount of Tax
C. Passive Loss Rules
D. Tax-Exempt or Governmental Use
E. Lodging
VII. Recapture and Audit Procedure
A. General
B. Casualty
C. Disposition of Partnership Interests, Stock in S Corporations, and Interests in Trusts and Estates
D. Different Recapture Events for Pass-Through Transaction
E. Application of Partnership Audit Rules
1. TEFRA Partnership Audit Rules
2. BBA Partnership Audit Rules
VIII. Credit Investor
A. Any Taxpayer Can Use Credit
B. General Business Credit
C. Investment Credit
D. Mechanics of Claiming Credit
E. Allocation of Credit
IX. Typical Credit Structures
A. Single-Tier Structure
B. Pass-Through Structure
C. Comparison of Single-Tier and Pass-Through Structures
D. Structures to Combine Rehabilitation Credit with New Markets Tax Credit
E. Structure to Combine Rehabilitation Credit with Low-Income Housing Tax Credit
X. Boardwalk Case and Guidance
A. Boardwalk Case
B. Summary of Boardwalk Case
C. Boardwalk Guidance
D. Summary of Boardwalk Guidance
1. Defined Terms Used in the Safe Harbor
2. Prohibition on Investor Investing in Developer Partnership if Investor Receives Credit Through a Master Tenant Partnership
3. Member's Minimum Interests in Developer Partnership and/or Master Tenant Partnership; Flip Permitted
a. Minimum 1% Interest for Principal
b. Minimum Interest for Investor
c. Flip Permitted
4. Investor's Partnership Interest Must Be a Bona Fide Investment with Value “Commensurate” with Overall Percentage Interest
a. Commensurate with Overall Percentage Interest
b. No Minimum Cash or Economics Required
c. Cash Flow Not Required to Be Distributed Pro Rata but Advisable to Do So
5. Prohibition on Arrangements to Reduce the Value of Investor's Partnership Interest
6. Limitations on “Sandwich” Leases in Master Tenant Partnership Structures
7. Investor Must Make Minimum Capital Contributions
a. 20% Minimum Capital Contribution
b. 75% of Capital Contribution Must Be Fixed in Amount
8. Impermissible and Permissible Guarantees
a. Impermissible Guarantees
b. Insurance
c. Permissible Guarantees
d. Guarantees for Performance or Non-Performance
e. Operating Deficit Guarantees
f. Definition of “Unfunded”; Limited Reserves Permitted
g. Certain Loans to Investor are Impermissible
9. Limitations on Purchase and Sale Rights on Exit
a. Prohibition on “Call” Rights
b. “Puts” Up to Fair Market Value are Permissible
10. Payment of Preferred Returns, Accrued but Unpaid Fees and Tax Distributions to Investor Are Permissible
11. Abandonment of Interest
12. Allocations of Credit Must Have “Substantial Economic Effect” Under §704(b)
E. Commentary on Boardwalk Case and Guidance
XI. Combining the Rehabilitation Credit with Other Tax Benefits
A. Tax-Exempt Bonds
B. New Markets Tax Credit
C. Low-Income Housing Tax Credit
D. Energy Tax Credit
E. Facade Easement

Working Papers

Table of Worksheets
Worksheet 1 Code §48 (as in effect prior to amendment by the Omnibus Budget Reconciliation Act of 1990 (Pub. L. No. 101-508))
Worksheet 2 Chart of Single Tier Structure
Worksheet 3 Chart of Pass Through Structure
Worksheet 4 Chart of Side By Side Structure to Combine Rehabilitation Credit and NMTC
Worksheet 5 Chart of Possible Alternative Structure to Combine Rehabilitation Credit and NMTC
Worksheet 6 Chart of Structure to Combine Rehabilitation Credit and LIHTC with Same Investor
Worksheet 7 Chart of Structure to Combine Rehabilitation Credit and LIHTC with Different Investors