26 U.S.C. § 47 — Rehabilitation credit

(a) General rule. If a taxpayer fixes up a "qualified rehabilitated building," the taxpayer gets a tax credit called the rehabilitation credit. This credit is paid out over a 5-year period, starting in the year the building is placed back in service. Each year, the taxpayer gets an equal "ratable share" — 20 percent of the total qualified rehabilitation expenditures — spread across the 5 years. (b) When expenditures are counted. Normally, the costs of fixing up the building are all counted in the year the building is placed back in service. But if the taxpayer already counted some of those costs early under the "progress expenditures" rule in subsection (d), the amount counted here is reduced by that early amount — as long as that early amount was not later required to be paid back ("recaptured") under section 50(a). (c) Definitions. A "qualified rehabilitated building" is a building where: (i) the building has been substantially rehabilitated, (ii) it was already in service before the rehabilitation started, (iii) it is a certified historic structure, and (iv) depreciation can be claimed on it. "Substantially rehabilitated" means the qualified rehabilitation costs spent during a 24-month period (chosen by the taxpayer) are more than the building's adjusted basis or $5,000, whichever is greater. That adjusted basis is measured at the start of that 24-month period, or the start of the taxpayer's ownership of the building, whichever is later — and any reconstruction the taxpayer does as part of the rehab does not change when that ownership period is considered to have started. If the rehab is done in planned phases under an architectural plan finished before work starts, a 60-month period is used instead of 24 months. The Treasury Secretary must write rules for how lessees (renters) apply this test. Rebuilding ("reconstruction") counts as rehabilitation. A "qualified rehabilitation expenditure" is money properly charged to capital account for depreciable property under section 168 that is nonresidential real property, residential rental property, real property with a class life over 12.5 years, or an addition or improvement to any of those — and the money must be spent on rehabilitating a qualified rehabilitated building. Some costs do NOT count as qualified rehabilitation expenditures: costs where the taxpayer does not use straight-line depreciation over the required recovery period (unless a special alternative depreciation rule applies); the cost of buying the building itself; costs of enlarging the building; costs of rehabilitating the building unless the Secretary of the Interior has certified the work as a "certified rehabilitation" consistent with the building's historic character; costs allocated to the part of the building that is (or is expected to be) tax-exempt use property (using a 50 percent test instead of the usual 35 percent test) — though this exclusion does not affect whether the building counts as "substantially rehabilitated"; and a lessee's costs if, when the rehab is finished, the lease has less time left than the property's recovery period. A "certified historic structure" is a building that is either listed on the National Register, or located in a registered historic district and certified by the Secretary of the Interior as historically significant to that district. A "registered historic district" is any district listed on the National Register, or any district set up by a state or local law that the Secretary of the Interior has certified as meeting the standards for preserving historic buildings and for substantially meeting the National Register's listing requirements. (d) Progress expenditures. This subsection lets a taxpayer count rehabilitation costs before the building is finished, if the project qualifies. It applies only to buildings where the normal rehab period is expected to be 2 years or more, and where it is reasonable to expect the building will end up as a qualified rehabilitated building. Whether a building qualifies is judged based on facts known at the end of the tax year when the rehab begins (or when the taxpayer's election to use this subsection first applies, if later). "Normal rehabilitation period" runs from when physical work begins (or the election's first effective year, if later) until the building is expected to be ready for service. For a "self-rehabilitated building" — one where the taxpayer itself will do more than half the work — costs are counted in the year they're properly charged to capital account. For any other building, costs are counted in the year they're paid. Special rules apply: materials that will become part of the building are counted only once they're irrevocably committed to the building, valued at the cost properly chargeable to capital account for that period; money the taxpayer borrows from the contractor doing the rehab does not count as an amount spent; for buildings that are not self-rehabilitated, the amount counted in any year cannot exceed the share of the total rehab cost that matches the share of work actually completed that year, measured by engineering, architectural, or cost-accounting records — and unless the taxpayer proves otherwise with clear and convincing evidence, the work is assumed to be completed no faster than evenly over the normal rehab period; any excess amount that couldn't be counted carries forward to the next year, and if the cap wasn't fully used, the leftover room also carries forward; no progress expenditures can be counted for any period before the taxpayer's election first takes effect; and no progress expenditures can be counted for the year the building is actually placed in service, or for the first year recapture is required under section 50(a)(2), or for any year after that. A taxpayer must formally elect to use this progress-expenditures method. Once made, the election applies to that year and every year after, and it can only be canceled with the Treasury Secretary's permission.