Recent changes to the rehabilitation tax credit

By Michael Bernier, CPA, and Dorian Hunt, CPA, Boston

Editor: Susan Minasian Grais, CPA, J.D., LL.M.

On Sept. 15, 2020, the IRS released final regulations (T.D. 9915) on rehabilitation credits for historic buildings. Under the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, these Sec. 47 credits must be allocated ratably over five years, beginning in the tax year the building was placed in service. The final regulations, among other things, seek to coordinate this new requirement for Sec. 47 credits with the special Sec. 50 rules for the investment credit related to recapture, basis adjustment, and leased property. The final regulations adopt the proposed regulations (REG-124327-19) without modification.

In July 2020, responding to the burdens the COVID-19 pandemic placed on taxpayers, the IRS extended the deadline to claim rehabilitation credits in Notice 2020-58 by giving taxpayers until March 31, 2021, to satisfy the requirements of the substantial-rehabilitationtest.

This item discusses these matters.


Former Sec. 47(a) established a two-tier credit for qualified rehabilitation expenditures (QREs) incurred in rehabilitating a qualified rehabilitated building (QRB). The credit was fully allowed in the tax year the QRB was placed in service. The former credit amounts were 20% for QREs for a certified historic structure and 10% for QREs for a QRB other than a certified historic structure, for certain buildings first placed in service before 1936.

The TCJA repealed the 10% credit for pre-1936 QRBs and modified the rules for claiming the 20% credit for historic structures. Under the post-TCJA rules, the 20% credit must be claimed ratably over five years, beginning in the tax year in which the QRB was placed in service.

The post-TCJA rules generally apply to QREs paid or incurred after Dec. 31, 2017. A transition rule covers situations where: (1) the taxpayer owned or leased the building on Jan. 1, 2018, and continues to own or lease the building after that date, and (2) the 24- or 60-month period selected by the taxpayer for phased rehabilitation begins by June 20, 2018. The pre-TJCA credit structure still applies to QREs that fall under this transitionrule.

Final regulations

The final regulations adopted the proposed regulations, which clarified that the rehabilitation credit is properly determined in the year the QRB is placed in service (as under prior law) and then allocated ratably over a five-year period (rather than being allocated entirely in the year the assets are placed into service). Regarding investment credits under Sec. 50, the final regulations implement this same pre-TCJA approach for the determination of a single rehabilitation credit for purposes of applying the Sec. 50 rules on recapture, basis adjustment, and leased property. As a result, claiming the rehabilitation credit under Sec. 47 for QREs paid or incurred after Dec. 31, 2017, generally will have the same federal income tax consequences as the rules under Sec. 50 would produce for taxpayers claiming the rehabilitation credit under the law prior to amendment by the TCJA.

Details in Regs. Sec. 1.47-7

The final regulations add Regs. Secs.1.47-7(a) through (e):

Regs. Sec. 1.47-7(a): For purposes of the investment credit under Sec. 46, the rehabilitation credit for the year is the ratable share for any tax year during the five-year period.

Regs. Sec. 1.47-7(b): A "ratable share" is 20% of the "rehabilitation credit determined" for the QRB, as allocated ratably to each tax year during the five-year credit period.

Regs. Sec. 1.47-7(c): The "rehabilitation credit determined" is 20% of the QREs under Sec. 47(b)(1) for the tax year in which the QRB is placed in service. If, however, the taxpayer claims the additional first-year depreciation for the QREs under Regs. Sec. 1.168(k)-2(g)(9), the "rehabilitation credit determined" is 20% of the remaining rehabilitated basis of the QRB for the tax year in which the QRB is placed in service.

Regs. Sec. 1.47-7(d): The rehabilitation credit for the purpose of Sec. 50 is determined in the same manner as for Sec. 47.

Regs. Sec. 1.47-7(e): This regulation contains examples that show the general calculation for claiming the rehabilitation credit, as well as examples illustrating the interaction of Sec. 47 with rules in Sec. 50(a) (recapture in case of dispositions), Sec. 50(c) (basis adjustment to investment credit property), and Sec. 50(d)(5) (relating to certain leased property when the lessee is treated as the owner and is subject to an income-inclusion requirement).

Measuring period extended

To qualify for the rehabilitation credit, a taxpayer must satisfy the substantial-rehabilitation test in a 24-month period (or a 60-month period for phased rehabilitation). Under this test, the QREs during the measuring period selected by the taxpayer must be more than the greater of the taxpayer's adjusted basis in the building (and its structural components) or $5,000.

Under Notice 2020-58, if the 24- or 60-month measuring period for either the substantial-rehabilitation test or qualifying for the transition rule ends on or after April 1, 2020, and before March 31, 2021, the last day for a taxpayer to incur the requisite QREs is postponed until March 31, 2021. As a result, a taxpayer may have a measuring period that is longer than 24 or 60 months.


While there were no changes to the regulations as part of the finalization process, the preamble clarified an important issue for tax-equity investors. It simplifies the structuring of tax-equity transactions by clarifying that (1) the QREs are allocated in the year in which the project is placed in service and (2) the taxpayer then calculates the tax credit based on the QREs. This approach avoids the potential for reallocation of tax credits after year 1 if other tax attributes are reallocated under Sec. 704(b).

The extension for passing the substantial-improvement test and generating the credit provides relief to taxpayers that had seen construction slow or stop due to the pandemic. This is important due to the cliff nature of thedeadline.


Susan Minasian Grais, CPA, J.D., LL.M., is a managing director at Ernst & Young LLP in Washington, D.C..

For additional information about these items, contact Ms. Grais at 202-327-8788 or

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP. 

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