Final regulations clarify that the amount of the rehabilitation credit for a qualified rehabilitated building (QRB) is determined as a single credit in the year the QRB is placed in service. This is the case even though the credit is allocated ratably over a five-year period. The final regulations adopt without modification proposed regulations released earlier this year ( NPRM REG-124327-19).
TCJA Changes to Rehabilitation Credit
The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) amended the rehabilitation credit for amounts paid or incurred after 2017. The credit is now claimed ratably over a five-year period that begins in the year the QRB is placed in service. The ratable share for each year is 20 percent of the qualified rehabilitation expenditures (QREs) for the building. However, a transition rule allows certain taxpayers to claim the credit all in one year under pre-TCJA rules if the 24- or 60-month period selected for the substantial rehabilitation test began by June 20, 2018.
Final Rehabilitation Credit Regs Include Coordination Rules and Examples
The amended version of the rehabilitation credit is still determined in the year the QRB is placed in service. This single credit is then claimed ratably over five years. This single-credit approach also applies to the recapture, basis adjustment, and leased property rules. These results are consistent with pre-TCJA law.
To reflect these changes, the final regs provide:
- a general rule for calculating the rehabilitation credit;
- definitions of “ratable share” and “rehabilitation credit determined;”
- a rule coordinating the amended credit with the Code Sec. 50 rules for the investment credit; and
- examples illustrating the interaction of the credit with Code Sec. 50(a) (recapture in case of dispositions, etc.), Code Sec. 50(c) (basis adjustment to investment credit property); and Code Sec. 50(d)(5) (relating to certain leased property when the lessee is treated as owner and subject to an income inclusion requirement).
Effective Date for Rehab Credit Regs
The final regulations apply to tax years beginning on or after the date they are published in the Federal Register. However, taxpayers may apply them to QREs paid or incurred after December 31, 2017, as long as they apply them in their entirety and in a consistent manner.