Recent federal tax legislation changed the rules in several ways for buildings using historic tax credits to finance improvements. The new tax law modified the timing on when the credits are claimed from one year to over a five-year period. The tax credit market is still adjusting to these changes, but the tax credit pricing for spreading the credits over five years under the new rules reduces the value of the credits.
However, the good news is that buildings that were owned or under a long-term lease as of December 31, 2017, can use special transition rules that allow the full amount of the credit to be claimed in the year the building is placed in service, just like the previous rules.
How it works:
Acquisition – The building must be owned by 12/31/17 – by actual purchase or through a long-term lease.
Substantial Rehabilitation – Congress wanted buildings to be substantially improved, not just a cosmetic clean up, so a “substantial rehabilitation” test was created. Under the transition rules, the measuring period for substantial rehabilitation must begin 180 days after the new law was enacted (approximately 7/1/18). However, this does not mean construction has to start by this date, but construction must be completed by 12/31/2020, under the new rules. Either measuring period can still be used – 24 months or 60 months.
The substantial rehabilitation test requires that the building owner must spend an amount equal to or greater than the adjusted basis of the building on qualified rehabilitation expenditures (QRE).
The adjusted building basis = acquisition – land – depreciation + improvements made prior to the beginning of the 24-month measuring period.
QREs are construction work and related soft costs that are done within the original footprint and volume of the building and are not furniture, fixtures, and equipment. Costs are not allowed for parking lots, landscaping, additions, enlargement, etc.
As noted above, the measuring period selected can be 24 months or 60 months. The 60-month period can be elected if the building improvements were initially planned to take longer than 24 months and written documentation such as architectural drawings are made in advance of any construction work.
Timing of construction is key
The new transition rules will make it more challenging to time construction as owners must complete the project by the mandatory completion date. However, failing to meet the transition rules would not cause your project to lose its tax credits, but rather the credits would have to be claimed over a five year period.
For more information on Historic Tax Credits contact your MarksNelson professional at 816-743-7700.