Real estate is an important part of any comprehensive financial portfolio, but when it comes to utilizing tax credits, many property owners continue to lose out.
Despite the benefits, finding and applying applicable tax credits can be difficult and overly complicated, meaning many property owners often fail to take advantage of credits they may qualify for.
To help, we’ve assembled a list of three top federal and state real estate tax credits.
1. Rehabilitation Tax Credit
As part of a program to encourage private sector investment in the rehabilitation and reuse of historic buildings, this tax credit can be applied to costs incurred for rehabilitation and reconstruction of certain historical buildings.
A 20% credit is available for qualifying expenses paid for the rehabilitation of commercial or residential historic buildings. This does not include a property the owner occupies and qualification is dependent on the award of two certificates:
- The certification of the structure, certifying that the property is either a certified structure or located in a historic district and contributes to the significance of the district, and
- The certification of the rehabilitation, as certified by the U.S. Department of Interior and National Park Service
Although the Tax Cuts and Jobs Act left the 20% credit intact, the new tax law reformed the timing of when the 20% credit can be taken. Under the old rule it was a one-time credit from the time the building was placed in service. However, now the 20% credit is claimed ratably over a five-year period.
However, the Tax Cuts and Jobs Act provides that certified historic structures and pre-1936 buildings that were owned or leased continuously on and after January 1, 2018, can take advantage of the old rule if certain requirements are met. The requirements pertain to the timing of meeting the “substantial rehabilitation test,” which is a whole other blog post.
Prior to the passing of the sweeping Tax Cuts and Jobs Act, a 10% credit was given for qualifying expenses paid for the rehabilitation of non-historic commercial buildings (excluding residential rental properties) placed into service before 1936. The Tax Cuts and Jobs Act eliminated this 10% credit for non-historic commercial buildings for amounts paid or incurred after December 31, 2017.
2. Americans with Disabilities Act (ADA) Tax Credit
To assist property owners with ADA compliance, tax credits are available for businesses.
For small businesses, an ADA tax credit (Section 44 of the IRS Code) is available to businesses that had less than $1 million in revenue or employed 30 or fewer full-time employees in the previous tax year. Covering 50% of the eligible access expenditures in a year (up to $10,250, with a maximum credit of $5,000), this tax credit can be used to offset the cost of:
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Making property alterations to improve accessibility
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Providing accessible language formats such as Braille, large print and audio tape
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Employing a sign language interpreter or a reader for customers or employees
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Purchasing certain adaptive equipment
For all businesses, an ADA tax credit (Section 190 of the IRS Code) allows a tax deduction of $15,000 per year, to be claimed for expenses incurred in making alterations to the business’ property to improve accessibility. Amounts exceeding $15,000 must be capitalized.
3. Low-Income Housing Tax Credit (LIHTC)
The LIHTC program was created by the Tax Reform Act of 1986 as an alternate method of funding housing for low- and moderate-income households, and has been in operation since 1987. For credits to be applicable, they must be used for new construction, rehabilitation, or acquisition and rehabilitation of a residential property, meeting the following qualifications:
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More than 20% of the residential units in the project must be rent restricted and occupied by individuals whose income is 50% or less than the area’s median gross income, or
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More than 40% of the residential units in the project must be rent restricted and occupied by individuals whose income is 60% or less than the area’s median gross income
Properties that receive tax credits are required to meet these qualifications and maintain eligibility for a minimum of 30 years.
With heavy IRS regulations and program restrictions, many property owners have difficulty obtaining the full benefits of the LIHTC program. As a result, most LIHTC properties are owned by limited partnership groups that have been put together by syndicators.
Using this method, a variety of companies and private investors participate within the LIHTC program, investing in housing development and receiving credit against their federal tax liability in return. The credits are administered by individual states and each state has its own rules and nuances on how it calculates credit eligibility and amount.
Need Help?
Federal and state tax laws are always changing. At Gross Mendelsohn, we can help you develop a comprehensive plan to achieve the best financial positioning for you and your real estate investments.
Contact us online or call 800.899.4623.
Editor’s note: This post was originally published in January 2014 and has been updated to reflect new insights and information, particularly changes brought about by the Tax Cuts and Jobs Act.
