Now that you have a general understanding of how to use historic tax credits in your project, there are a few things to keep in mind after you complete your rehabilitation:
- You do not receive the tax credit until you file your tax return for the year in which you place the building in service. For example, if you complete your rehabilitation in April of 2009, your first opportunity to redeem the credit will come when you file your 2009 tax return in the Spring of 2010. Therefore, you will need to pay the full cost of the rehabilitation and will be reimbursed the amount of the credit (by paying less taxes) in future years as you redeem the credits.
- You must reduce your basis in the property by the full amount of the historic tax credit earned. Ability to redeem the credit does not factor into this basis reduction calculation.
- You must depreciate your property using the straight-line method, 27.5 years for residential and 39 years for commercial. These rules would generally apply to the depreciation of real property regardless of the historic tax credit.
- You must not sell or substantially change the ownership of the property for the first five years following completion of the rehabilitation Any building removed from the National Register during the recapture period (e.g., due to loss of historic integrity because of inappropriate alterations performed by the owner or if the building is destroyed due to casualty and cannot be rebuilt), will face pro-rated recapture of the credit by the IRS. While 100 percent of the credit is earned at the placed-in-service date, the owner becomes vested in the credits at the rate of 20 percent per full year (no pro-rating for partial years).
As an example, assume a property owner rehabilitates a building and earns a $100,000 historic tax credit. The owner subsequently sells the property to another party at the two year and one month mark following completion of the rehabilitation. IRS regulations state that 60 percent (5 – 2 full years owned since rehabilitation completion * 20 percent/year), or $60,000, of the credit be recaptured in this case. By waiting until after year five to sell the property, the owner is permitted to sell the property while benefitting from the full amount of the credit earned.
Finally, donating a facade easement during the recapture period is considered a partial disposition of the property. This event will trigger recapture of all or part of the credit if the contribution is made within the recapture period.