The Internal Revenue Service has good news for taxpayers restoring historic buildings. Last week, the agency announced that they have granted additional time to qualify for the Rehabilitation Tax Credit to mitigate logistical issues arising from the coronavirus pandemic.
What is the Rehabilitation Tax Credit?
The rehabilitation tax credit lets real estate owners deduct a percentage of the renovation cost from qualifying buildings if the project meets certain qualifying conditions. The IRS says that “projects must satisfy the ‘substantial rehabilitation test’ within a 24- or 60-month period for determining whether the rehabilitation work is sufficient to qualify a building for the rehabilitation credit.” Which timeframe applies is governed by the Tax Cuts and Jobs Act.
“The … [TJCA] generally requires the rehabilitation credit to be claimed over a five-year period for amounts that taxpayers pay or incur for qualified rehabilitation expenditures after December 31, 2017,” the IRS explains in last week’s release. “However, taxpayers may claim the credit all in one year under pre-TCJA rules for projects that qualify under a transition rule.”
While you can and should read more about how the rehabilitation tax credit is met for current and future renovation projects in Notice 2020-56, IRS.gov has a concise breakdown titled “Rehabilitation Tax Credit – Real Estate Tax Tips.” It outlines the TCJA-related changes, when the transition rule applies, and who needs to file Form 3468, Investment Credit.
How much additional time do I have to satisfy the substantial rehabilitation test?
Following the publication of Notice 2020-56, “taxpayers that have a measuring period under the substantial rehabilitation test ending on or after April 1, 2020, and before March 31, 2021, now have until March 31, 2021 to satisfy the test … [which also] applies to the substantial rehabilitation test for claiming the credit or qualifying under the TCJA transition rule.”
Sources: IR-2020-173; IRS Tax Reform Tax Tip 2018-161