Low-Income Housing and Rehabilitation Tax Credits
There is a nonrefundable tax credit for low-income housing that can be claimed annually over a period of 10 years for low-income housing that is newly constructed, rehabilitated, or acquired (IRC §42). A low-income housing project is a residential rental property meeting the requirements for low-income tenant occupancy and gross rent restrictions, where the taxpayer has received a low-income housing credit allocation from a state or local housing authority that has jurisdiction over the project, and the housing has received IRS certification. The property must be subject to MACRS depreciation. If a project fails to meet any of these requirements within 15 years after applying for the credit, then a portion of it may be recaptured, which is calculated on Form 8611, Recapture of Low-Income Housing Credit.
The credit is claimed on Form 8609, Low-Income Housing Credit Allocation and Certification for each building within a project. If the owner is organized as a pass-through entity, such as a partnership or an S corporation, then the investors of the entity can claim their credit on Form 8586, Low-Income Housing Credit, which must be attached to their tax return, unless they are able to claim it on Form 3800, General Business Credit, if the property was placed in service before July 30, 2008.
The IRS determines the applicable credit rating percentages and differs depending on whether it is for new construction or rehabilitation, whether the project is already subsidized, and whether the project was acquired. However, a taxpayer may make an irrevocable election to determine the credit percentage before the building is placed in service. The credit is not affected by the for-profit rules to determine if there was a profit motive in the project.
Under the new tax package passed by the Republicans at the end of 2017, known as the Tax Cuts and Jobs Act, the Rehabilitation Tax Credit must be taken ratably over 5 years instead of claiming the entire credit in the year when the property was placed in service. It also eliminates the 10% rehabilitation credit for pre-1936 buildings. However, owners of a certified historic structure or a pre-1936 building may continue to use the prior law if:
- the taxpayer owns or leases the building on January 1, 2018, and thereafter; and
- the 24- or 60-month period for the substantial rehabilitation test begins by June 19, 2018.
There is a rehabilitation tax credit, which is part of the investment credit, for qualifying rehabilitated buildings (QRB) that are substantially rehabilitated and for certified historic buildings.
- A 10% credit can be claimed for qualified rehabilitation expenses (QRE) for buildings constructed before 1936, which are not certified historic buildings. This credit only applies to pre-1936 nonresidential property with at least 50% of the original external walls and 75% of the original internal structural framework.
- A 20% credit can be claimed for rehabilitating certified historic structures. A certified historic structure may be residential and nonresidential, but the National Park Service must certify that the rehabilitation conforms to the building's historic status designation.
- The 10% credit is increased to 13% for pre-1936 buildings and the 20% credit for certified historic structures is increased to 26% if they are located in the 2008 Midwestern Disaster Area or the Gulf Opportunity Zone.
To qualify for these credits, rehabilitation expenses must be the greater of $5000 expended over a 2-year period or the adjusted basis of the building. However, the credit also reduces the basis of the property, thereby lessening depreciation deductions. Qualified rehabilitation expenses do not include new construction, acquisition cost, or the rehabilitation of tax-exempt property. The property must be depreciated over a specified recovery period, using the straight line MACRS. If a lessee claims the credit, then the remaining terms of the lease must be at least as long as the applicable recovery period.
The credit can be claimed on Form 3468, Investment Credit. Rehabilitation credits may be recaptured if, within 5 years, the property is disposed of or the use of the property has changed. The recaptured amount is calculated on Form 4255, Recapture of Investment Credit. Both the low-income housing and the rehabilitation tax credits are subject to the limits and carryover rules of the general business credit claimed on Form 3800 or by passive activity restrictions, which are figured on Form 8582-CR, Passive Activity Credit Limitations.