Exhibit 1-1 (3 of 5)
Chapter 9 CREDIT RECAPTURE
** Required both before and after TRA 86
Applicable Law:
IRC § 50 (a)
Treas. Reg. § 1.48-12(f) (3)
Rome Case
*Prior to Rev Rec of 90
IRC § 47(a) contains similar provisions.
If there is a disposition or if the property ceases to be
ITC property before the close of the recapture period of
5 years, there is a recapture of the credit amounting to
20 percent of the credit taken for each year less than 5
full years.
NOTE: Although the credit is fully allowed in a given
year, as long as the property had been placed in
service by year end, the credit recapture is
based on a “Full Year” concept. It is necessary
to determine the actual date placed in service in
order to compute the recapture.
Chapter 10 ACQUISITION COSTS EXCLUDED
** Both before and after TRA 86.
Applicable Law:
IRC § 47(c) (2)(B)(ii)
Treas. Reg. § 1.48-12(c)(7)(ii)
Treas. Reg. § 1/48-12(d) (9)
Acquisition costs are specifically excluded from the
definition of qualified rehabilitation expenditures. The
cost of acquiring any building or interest, therein; pre-
rehab cost of acquiring the building or the cost of
acquiring a rehabilitation building that had previously
been placed in service would not qualify. Acquisition
costs are still included in the depreciable basis using the
straight method. Also see issue regarding developer’s
fees and other costs which could potentially be
recharacterized for their proper tax treatment.
Chapter 11 ENLARGEMENT EXPENDITURES AND
DEMOLITION EXCLUDED
** Both before and after TRA 86.
Applicable Law:
IRC § 47 (c)(2)(B)(iii)
Treas. Reg. § 1.48-12(c)(7)(iii)
Treas. Reg. § 1.48-12(d)(10)
IRC § 280B - Demolition
Enlargement costs of an existing building are
specifically excluded from the definition of qualified
rehabilitation expenditures. A building is enlarged to
the extent that total volume is increased. Enlargement
costs are still includible in the depreciable basis using
the straight line method. Enlargement costs should be
removed from the credit basis using a reasonable
method of allocation. Demolition costs qualify as long
as the building remains after the allowable demolition.
Chapter 12 SITEWORK EXPENDITURES EXCLUDED
** Applies both before and after TRA 86.
Applicable Law:
Treas. Reg. § 1.48-12(c) (5)
Sitework expenditures do not qualify for the credit and
should be removed from the credit basis. Sitework
includes any expenditures incurred for areas adjacent to
or related to the rehabilitated building including
sidewalks, paving, landscaping, parking lots, decks,
remote site lighting, fencing, railings, ornamental
fencing, gazebos, etc.
Chapter 13 SECTION 38/PERSONAL PROPERTY
EXCLUDED
** Applies both before and after TRA 86
Applicable Law:
IRC § 47(c) (2) (A)
IRC § 38
** See numerous court cases included in this
section
Regular IRC § 38 Investment Credit property does not
qualify for the rehab credit. Examples are office
equipment, furniture, carpeting, drapes, kitchen
appliances, cabinets, etc.
NOTE: If disallowing or removing Section 38 property
from the rehab basis then the straight line
recovery election is no longer required for those
items. Can allow ACRS, MACRS, etc.
The Rehab Credit is only for the building and its
structural components. There is sufficient law/cases
under the ITC sections to support.
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