Category: Deductions & Credits; Real Estate
Subject: Rehabilitation Credit
Title: Issues Related to Certified Historic Structure
IRC Sections: 49(a)(1)
Date Produced: 05/93
Copyright 1998, The Tax Resource Group. All rights reserved. Telephone
800-578-3498. Internet: www.taxresourcegroup.com
Taxpayer (TP) has purchased a certified historic structure which he plans
to rehabilitate in order to obtain the rehabilitation credit. The purchase
price of the property was approximately $60,000 and renovation is expected
to cost approximately $300,000. TP anticipates obtaining the rehabilitation
funds on a nonrecourse basis from his mother-in-law.
We previously discussed the non-viability of the arrangements set forth
above for the following reasons.
1. Internal Revenue Code Section 49(a)(1)(A) provides that the credit
base of otherwise eligible property is reduced by any nonqualified nonrecourse
2. Nonqualified nonrecourse financing is any nonrecourse financing that
is not qualified commercial financing. IRC §49(a)(1)(D)(i).
3. Qualified commercial financing under IRC §49(a)(1)(D)(ii) is nonrecourse
I. with respect to property obtained from a non-related party,
II. which does not exceed 80% of the credit base of the property, and
III. which is obtained from a qualified person (generally an unrelated
party regularly engaged in the business of lending (See §49(a)(1)(D)(iv))
or from any federal. state, or local government or instrumentality thereof.
4. The 80% credit base rule described above appears to be violated.
After excluding reasonable land value, it appears that more than 80% of
the credit base of the property will have been financed. Violation of
this rule causes exclusion of the entire amount of financing, not just the
5. The financing is not obtained from a qualified lender. First, the
mother-in-law is a related party under §§49(a)(1)(D)(v), 465(b)(3)(C)
and 267(b)(3). Second, the mother-in-law is presumably not regularly engaged
in the business of lending.