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Q&A: Historic Tax Credit Recapture Basics

Published by Charlie Rhuda, CPA on Tuesday, February 1, 2011

Journal cover February 2011   Download PDF

Question: What can cause recapture of federal rehabilitation (historic) tax credits? How is recapture calculated?

Answer: A historic building that has been subject to a “qualified rehabilitation” may be required to recapture all or a portion of the rehabilitation claimed if a recapture event occurs. The following are considered recapture events:

  • the building is sold,
  • the building ceases to be “business use property,”
  • a partner disposes greater than one–thirds of its interest,
  • the National Park Service (NPS) removes the building from the National Register,
  • the NPS determines the building no longer contributes to a Registered Historic District, or,
  • the building is destroyed by a casualty.

There are also a number of events that are somewhat similar to the recapture events listed above that do not trigger recapture. These events include: a simple transfer between spouses or where there is a spousal transfer due to a divorce; a transfer due to death; a transfer due to certain tax free corporate reorganizations (see Internal Revenue Code (IRC) §381(a) and IRC §50(a)(4)); or where there is a change in the form of the business entity, but only if the property retains the same trade or business status.

If a recapture event occurs, the amount of the recapture is 20 percent of the rehabilitation credit claimed for each anniversary remaining in the five-year recapture period. If the recapture event occurs before the end of the first tax anniversary of the placed-in service date of the qualified rehabilitation expenditure (QRE), the recapture is 100 percent of the credit claimed. If the recapture occurs before the end of the second anniversary date, the recapture percent is 80 percent of the credit claimed, and so forth until the end of the fifth QRE placed-in-service anniversary date. The recapture provisions are contained in IRC §50a and Treasury Reg. 1.48-12(f)(3).

If a building that has been the subject of a qualified rehabilitation is sold, it is clear that a recapture event has occurred. However several of the recapture events listed earlier in this article warrant additional clarification.  

If a building ceases to be “business use property,” a recapture event has occurred. In order to claim the credit, the property must be an income producing property. This excludes personal residences, churches, fraternal halls or any other non-income producing use. The business use property designation also covers the issue of tax-exempt use that was discussed in a previous article. (For details, see “Historic Tax Credit and Disqualified Leases” from the July 2010 Journal of Tax Credits.)

If a building is held in a partnership (or an LLC electing to be treated as a partnership), then a change in a partner’s interest in the partnership may trigger recapture of the credits claimed by that partner. In order for a recapture event to occur, that partner’s new interest in the partnership would have to be reduced by two-thirds. So if a partner sells or transfers more than one-third of its interest in a partnership that held a property that had been the subject of a qualified rehabilitation, that partner will be required to recapture a portion of the credits it has claimed. Thus, if a partner’s interest is reduced from 60 percent to 30 percent (a 50 percent reduction) and this event occurs before the end of the second QRE placed-in-service anniversary date, the amount of the recapture would be 80 percent times the 50 percent reduction in the partner’s interest. For example, if the partner claimed $75,000 in tax credits the recaptured amount would be $75,000 x 80% x 50% = $30,000.

The two recapture events in the previous list that involve the NPS have nothing to do with the ownership structure, but rather with the standing of the building and its historic nature.

Finally, a casualty loss (destruction or partial destruction) would result in recapture. Unlike the low-income housing tax credit, with which many readers are likely familiar, there is no “reasonable time” to restore property after a casualty has occurred. Once it is destroyed, a qualified rehabilitation cannot be replaced to avoid recapture. The credit is recaptured using the same 20 percent declining recapture calculation timeline discussed earlier.

If you have additional questions about recapture events, or how your historic rehabilitation may be affected, please contact [email protected] or 617-330-1920 x116.

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