Written by: Nancy Morton
Rehabilitation Expenditures of a Purchased Existing Building
When a taxpayer is purchasing a building in order to rehabilitate the building to take rehabilitation credits under Section 42, the taxpayer needs to be aware if the previous owner has incurred any rehabilitation expenditures that have not yet been placed in service. This can be a planning opportunity for the taxpayer in order to increase their eligible basis for calculating the credit.
If a taxpayer purchased a building in which the previous owner had begun to incur rehabilitation expenditures, then there may be an opportunity for the taxpayer to use those rehabilitation expenditures as eligible basis in determining the low income housing credit if the previous owner has not placed the rehabilitation expenditures into service or depreciated the expenditures before selling the property. In addition, the previous owner must not have received a housing credit dollar amount allocation for the rehabilitation expenditures the previous owner has incurred before selling to the taxpayer.
If the above criteria are met, then the purchase price of the existing building and the rehabilitation expenditures are bifurcated into two different components. The portion of the purchase price attributable to the existing building may not be included in eligible basis since rehabilitation expenditures do not include the cost of acquisition of the building. The existing building cost may be included as an acquisition cost if the building meets all of the requirements for acquisition credits under Section 42(d)(2)(B).
Under Revenue Ruling 91-38, rehabilitation expenditures acquired before the property is placed in service are treated as having been incurred directly by the taxpayer. Under rules similar to the removed Regulation 1.167(k)-1(b)(1), the guidance treat the taxpayer as having paid or incurred the expenditures to the extent of the lesser of the rehabilitation expenditures paid or incurred before the acquisition or the taxpayer’s cost or other basis attributable to the rehabilitation expenditures. When the taxpayer places the rehabilitation expenditures into service, the property’s original use is considered to be with the taxpayer. Rehabilitation expenditures are treated as having been paid or incurred by the taxpayer on the date on which the expenditures were actually paid or incurred.
Even when the taxpayer is planning on taking both the acquisition credit as well as the rehabilitation credit under Section 42, this can be a great planning opportunity in maximizing the amount of total credits generated by the project.
Nancy Morton is a member at Dauby O’Connor & Zaleski, LLC. Nancy has been in the practice of public accounting for over 18 years, having worked with the international accounting firms of Arthur Andersen and Deloitte & Touche prior to joining Dauby O’Connor & Zaleski, LLC in December 2001.