IRS Section 47

Internal Revenue Code, Section 47
REHABILITATION CREDIT
This Act became law on November 5, 1990 (Public Law 101-508; 26 U.S.C. 47). It is the
current version of the certified rehabilitation section previously contained in Section 48(g)
of the Internal Revenue Code of 1986 [26 U.S.C. 48(f)]. The Act has not been amended
since the re-codification into Section 47. Public Law 95-600 (1978) and six amendments
contributed to the development of the rehabilitation credit while it was codified in
26 U.S.C. 48(g).
Rehabilitation credit

Section 47

26 U.S.C. 47(a),
Amount of credit

(a) For purposes of section 46, the rehabilitation credit for
any taxable year is the sum of—
(1) 10 percent of the qualified rehabilitation expenditures with respect to any qualified rehabilitated building
other than a certified historic structure, and
(2) 20 percent of the qualified rehabilitation expenditures with respect to any certified historic structure.

26 U.S.C. 47(b),
Correct timing for
claiming credit, in
general

(b)(1) Qualified rehabilitation expenditures with respect
to any qualified rehabilitated building shall be taken into
account for the taxable year in which such qualified rehabilitated building is placed in service.

Progress expenditurerelated recapture,
coordination with
subsection (d)

(2) The amount which would (but for this paragraph)
be taken into account under paragraph (1) with respect to
any qualified rehabilitated building shall be reduced (but
not below zero) by any amount of qualified rehabilitation expenditures taken into account under subsection
(d) by the taxpayer or a predecessor of the taxpayer (or,
in the case of a sale and leaseback described in section
50(a)(2)(C), by the lessee), to the extent any amount so
taken into account has not been required to be recaptured
under section 50(a).

26 U.S.C. 47(c),
Definitions

(c) For the purposes of this section—

Qualified rehabilitated
building, in general

(1)(A) The term “qualified rehabilitated building”
means any building (and its structural components) if—
(i) such building has been substantially
rehabilitated,
(ii) such building was placed in service before the
beginning of the rehabilitation,

External wall test for
non-certified historic
structure

(iii) in the case of any building other than a certified historic structure, in the rehabilitation process—

FEDERAL HISTORIC PRESERVATION LAWS

159

Internal Revenue Code, Section 47

(I) 50 percent or more of the existing external
walls of such building are retained in place as external
walls,
(II) 75 percent or more of the existing external
walls of such building are retained in place as internal or
external walls, and
(III) 75 percent or more of the existing internal
structural framework of such building is retained in place,
and
(iv) depreciation (or amortization in lieu of depreciation) is allowable with respect to such building.
Requirement for noncertified historic
buildings

(B) In the case of a building other than a certified
historic structure, a building shall not be a qualified rehabilitated building unless the building was first placed in
service before 1936.

Substantial rehabilitation defined,
in general

(C)(i) For purposes of subparagraph (A)(i), a building
shall be treated as having been substantially rehabilitated
only if the qualified rehabilitation expenditures during the
24-month period selected by the taxpayer (at the time and
in the manner prescribed by regulation) and ending with
or within the taxable year exceed the greater of—
(I) the adjusted basis of such building (and its
structural components), or
(II) $5,000.
The adjusted basis of the building (and its structural
components) shall be determined as of the beginning of
the 1st day of such 24-month period, or of the holding
period of the building, whichever is later. For purposes of
the preceding sentence, the determination of the beginning of the holding period shall be made without regard to
any reconstruction by the taxpayer in connection with the
rehabilitation.

Special rule for phased
rehabilitations

(ii) In the case of any rehabilitation which may
reasonably be expected to be completed in phases set
forth in architectural plans and specifications completed
before the rehabilitation begins, clause (i) shall be applied
by substituting “60-month period’’ for “24-month
period.’’

160 FEDERAL HISTORIC PRESERVATION LAWS

Internal Revenue Code, Section 47

Provisions for lessees
Reconstruction
Qualified rehabilitation
expenditures, in general

(iii) The Secretary shall prescribe by regulation
rules for applying this subparagraph to lessees.
(D) Rehabilitation includes reconstruction.
(2)(A) The term “qualified rehabilitation expenditure” means any amount properly chargeable to capital
account—
(i) for property for which depreciation is allowable
under section 168 and which is—
(I) nonresidential real property,
(II) residential rental property,
(III) real property which has a class life of more
than 12.5 years, or
(IV) an addition or improvement to property
described in subclause (I), (II), or (III), and
(ii) in connection with the rehabilitation of a qualified rehabilitated building.

Certain expenditures
not included

(B) The term “qualified rehabilitation expenditure’’
does not include—

Straight-line
depreciation

(i) Any expenditure with respect to which the
taxpayer does not use the straight line method over a
recovery period determined under subsection (c) or (g)
of section 168. The preceding sentence shall not apply to
any expenditure to the extent the alternative depreciation
system of section 168(g) applies to such expenditure by
reason of subparagraph (B) or (C) of section 168(g)(1).

Cost of acquisition,
enlargements

therein.

(ii) The cost of acquiring any building or interest

(iii) Any expenditure attributable to the enlargement of an existing building.
Certified historic structure eligible only for historic tax credit

(iv) Any expenditure attributable to the rehabilitation of a certified historic structure or a building in a registered historic district, unless the rehabilitation is a certified rehabilitation (within the meaning of subparagraph
(C)). The preceding sentence shall not apply to a building
in a registered historic district if—
structure,

(I) such building was not a certified historic

FEDERAL HISTORIC PRESERVATION LAWS

161

Internal Revenue Code, Section 47

(II) the Secretary of the Interior certified to the
Secretary that such building is not of historic significance
to the district, and
(III) if the certification referred to in subclause
(II) occurs after the beginning of the rehabilitation of such
building, the taxpayer certifies to the Secretary that, at the
beginning of such rehabilitation, he in good faith was not
aware of the requirements of subclause (II).
Tax-exempt use
property, in general

(v)(I) Any expenditure in connection with the
rehabilitation of a building which is allocable to the portion of such property which is (or may reasonably be
expected to be) tax-exempt use property (within the
meaning of section 168(h)).

Clause not to apply for
purposes of paragraph
(1)(C)

(II) This clause shall not apply for purposes of
determining under paragraph (1)(C) whether a building
has been substantially rehabilitated.

Lessee provisions

(vi) Any expenditure of a lessee of a building if,
on the date the rehabilitation is completed, the remaining term of the lease (determined without regard to any
renewal periods) is less than the recovery period determined under section 168(c).

Certified rehabilitation

(C) For purposes of subparagraph (B), the term
“certified rehabilitation” means any rehabilitation of
a certified historic structure which the Secretary of the
Interior has certified to the Secretary as being consistent
with the historic character of such property or the district
in which such property is located.

Non-residential real
property, residential
rental property, and class
life

(D) For purposes of subparagraph (A), the terms
“nonresidential real property,” “residential rental property,” and “class life” have the respective meanings given
such terms by section 168.

Certified historic structure defined, in general

(3)(A) The term “certified historic structure” means
any building (and its structural components) which—
(i) is listed in the National Register, or
(ii) is located in a registered historic district and is
certified by the Secretary of the Interior to the Secretary as
being of historic significance to the district.

Registered historic
district
162

(B) The term “registered historic district” means—

FEDERAL HISTORIC PRESERVATION LAWS

Internal Revenue Code, Section 47

(i) any district listed in the National Register, and
(ii) any district—
(I) which is designated under a statute of the
appropriate State or local government, if such statute is
certified by the Secretary of the Interior to the Secretary
as containing criteria which will substantially achieve the
purpose of preserving and rehabilitating buildings of historic significance to the district, and
(II) which is certified by the Secretary of the
Interior to the Secretary as meeting substantially all of the
requirements for the listing of districts in the National
Register.
26 U.S.C. 47(d),
Progress expenditures,
in general

(d)(1) In the case of any building to which this subsection
applies, except as provided in paragraph (3)—
(A) if such building is self-rehabilitated property, any
qualified rehabilitation expenditure with respect to such
building shall be taken into account for the taxable year
for which such expenditure is properly chargeable to capital account with respect to such building, and
(B) if such building is not self-rehabilitated property,
any qualified rehabilitation expenditure with respect to
such building shall be taken into account for the taxable
year in which paid.

Property to which
subsection applies,
in general

(2)(A) This subsection shall apply to any building which
is being rehabilitated by or for the taxpayer if—
(i) the normal rehabilitation period for such
building is 2 years or more, and
(ii) it is reasonable to expect that such building
will be a qualified rehabilitated building in the hands of
the taxpayer when it is placed in service.
Clauses (i) and (ii) shall be applied on the basis of
facts known as of the close of the taxable year of the taxpayer in which the rehabilitation begins (or, if later, at the
close of the first taxable year to which an election under
this subsection applies).

FEDERAL HISTORIC PRESERVATION LAWS

163

Internal Revenue Code, Section 47

Normal rehabilitation
period

(B) For purposes of subparagraph (A), the term “normal rehabilitation period” means the period reasonably
expected to be required for the rehabilitation of the building—
(i) beginning with the date on which physical work
on the rehabilitation begins (or, if later, the first day of the
first taxable year to which an election under this subsection applies), and
(ii) ending on the date on which it is expected that
the property will be available for placing in service.

Special rules for applying
paragraph (1)
Component parts, etc.

(3) For purposes of paragraph (1)—
(A) Property which is to be a component part of, or
is otherwise to be included in, any building to which this
subsection applies shall be taken into account.—
(i) at a time not earlier than the time at which it
becomes irrevocably devoted to use in the building, and
(ii) as if (at the time referred to in clause (i)) the
taxpayer had expended an amount equal to that portion
of the cost to the taxpayer of such component or other
property which, for purposes of this subpart, is properly
chargeable (during such taxable year) to capital account
with respect to such building.

Certain borrowing
disregarded

(B) Any amount borrowed directly or indirectly by
the taxpayer from the person rehabilitating the property
for him shall not be treated as an amount expended for
such rehabilitation.

Limitation for buildings
which are not selfrehabilitated, in general

(C)(i) In the case of a building which is not selfrehabilitated, the amount taken into account under paragraph (1)(B) for any taxable year shall not exceed the
amount which represents the portion of the overall cost to
the taxpayer of the rehabilitation which is properly attributable to the portion of the rehabilitation which is completed during such taxable year.

Carryover of certain
amounts

(ii) In the case of a building which is not a selfrehabilitated building, if for the taxable year—

164 FEDERAL HISTORIC PRESERVATION LAWS

Internal Revenue Code, Section 47

(I) the amount which (but for clause (i)) would
have been taken into account under paragraph (1)(B)
exceeds the limitation of clause (i), then the amount of
such excess shall be taken into account under paragraph
(1)(B) for the succeeding taxable year, or
(II) the limitation of clause (i) exceeds the
amount taken into account under paragraph (1)(B), then
the amount of such excess shall increase the limitation of
clause (i) for the succeeding taxable year.
Determination
of percentage of
completion

(D) The determination under subparagraph (C)(i) of
the portion of the overall cost to the taxpayer of the rehabilitation which is properly attributable to rehabilitation
completed during any taxable year shall be made, under
regulations prescribed by the Secretary, on the basis of
engineering or architectural estimates or on the basis of
cost accounting records. Unless the taxpayer establishes
otherwise by clear and convincing evidence, the rehabilitation shall be deemed to be completed not more rapidly
than ratably over the normal rehabilitation period.

No progress expenditures
for certain prior periods

(E) No qualified rehabilitation expenditures shall be
taken into account under this subsection for any period
before the first day of the first taxable year to which an
election under this subsection applies.

No progress expenditures
for property for year it is
placed in service, etc.

(F) In the case of any building, no qualified rehabilitation expenditures shall be taken into account under this
subsection for the earlier of—
(i) the taxable year in which the building is placed
in service, or
(ii) the first taxable year for which recapture is
required under section 50(a)(2) with respect to such property,
or for any taxable year thereafter.

Self-rehabilitated
building

(4) For purposes of this subsection, the term “selfrehabilitated building” means any building if it is reasonable to believe that more than half of the qualified rehabilitation expenditures for such building will be made directly
by the taxpayer.

FEDERAL HISTORIC PRESERVATION LAWS

165

Internal Revenue Code, Section 47

Election

(5) This subsection shall apply to any taxpayer only if
such taxpayer has made an election under this paragraph.
Such an election shall apply to the taxable year for which
made and all subsequent taxable years. Such an election,
once made, may be revoked only with the consent of the
Secretary.

166 FEDERAL HISTORIC PRESERVATION LAWS