Owner Can Qualify for Both Low-Income Housing Credit Claimed and Rehabilitation Tax Credit

A site owner rehabilitating an historical building may be doing it with the goal of turning it into a multifamily affordable housing site. As a result, the owner can qualify for both the Rehabilitation Tax Credit and the Low-Income Housing Tax Credit.

The low-income housing tax credit, which is available under section 42 of the Internal Revenue Code of 1986, is available to owners of buildings as an incentive to rehabilitate affordable multifamily housing for occupants who meet specific requirements. In some cases, the owner may also benefit from the use of the Historical Rehabilitation Tax Credit if the low-income housing tax credit project also meets the criteria established by the Department of the Interior, National Park Service.

Below is an example of how it would work. It comes from the IRS publication, “Rehabilitation Tax Credit” Training 3149-109 (Rev. 02/2002), available at www.irs.gov.

EXAMPLE: A site owner purchases an apartment building that has been designated a certified historic structure for $3,000,000. Of the total price, $500,000 is allocated to land. The owner decides to rehabilitate the building and spends $4,000,000 on qualified rehabilitation expenditures and claims the 20 percent rehabilitation tax credit. If the owner rents 40 percent of the building to low-income households and qualifies the project for the low-income housing tax credit, the tax benefits for this project are as follows:

Amount of Rehabilitation Tax Credit: $4,000,000 × .20 = $800,000

Amount of Local Income Housing Tax Credit:

Acquisition: $2,500,000 × .40 × .04 = $40,000
($3,000,000 purchase price – $500,000 land)

Rehabilitation: $3,200,000 × .40 × .09 = $115,200
($4,000,000 – $800,000 tax credit = $3,200,000)

Total Annual Credit: $155,200

Amount of Annual Depreciation: $6,500,000 – $800,000 = $5,700,000

($2,500,000 acquisition + $4,000,000 improvements = $6,500,000)
$5,700,000 ÷ 27.5 years = $207,273

Annual Depreciation = $207,273

Annual Tax Benefit = $58,036 (assumes a 28 percent tax bracket)