Tax Credits for Landlords (Rehabilitation tax credit, low-income housing credit)
This particular article of the Rental Property Tax Guide focuses on the different types of tax credits available to landlords who rent their property. A tax credit is better than a deduction because it is a one-for-one reduction of tax owed, while a deduction simply reduces the total amount of income that is taxable. This article will focus on two particular credits: the Rehabilitation Tax Credit, and the Low Income Housing Tax Credit.
Note: None of the tax credits associated with installing energy efficient appliances or products are applicable to rental homes.
Rehabilitation Tax Credit.
The Rehabilitation Tax Credit is a bit obscure, but may be very useful in certain situations. The credit is available as ten percent of qualified rehabilitation expenditures if the building is not a certified historic structure, and twenty percent of expenditures if the building is a certified historic structure. In order to be a certified historic structure, the building must be either listed in the National Register, or located in a registered historic district certified by the Secretary of the Interior as being of historic significance to the district. Otherwise, the ten percent credit is available if the building has been substantially rehabilitated, the building was placed in service before the beginning of the rehabilitation, the building was first placed in service before 1936, and the rehabilitation process left intact a certain percentage of the original structural framework of the building. “Substantially rehabilitated” means the expense of rehabilitation exceeds the greater of your adjusted basis in the building or five thousand dollars.
Low Income Housing Credit.
The IRS allocates housing tax credits to state agencies each year. Those state agencies then award the credits to developers of qualified projects in a competitive bidding process. To be eligible, a proposed project must commit to one of two occupancy threshold requirements; restrict rents, including utilities, in low-income units; and operate under these restrictions for thirty years or longer. The occupancy threshold requirement must be either: 1) twenty percent of units must be rent restricted and occupied by households with incomes at or below fifty percent of the area median income as determined by the Department of Housing and Urban Development, or; 2) at least forty percent of the units must be rent restricted and occupied by households with incomes at or below sixty percent of the area median income. The limits on tenant-paid rent are based on a percentage of area median income, and adjusted for household size. This program may be combined with a program like Section 8 in order to allow the landlord to collect full market rent, with the tenant only paying the maximum rent allowable to continue tax credit eligibility.
Note: Given the complex nature of these tax credits, please consult a tax attorney or CPA before proceeding.