Amended 1984, 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11813(a), amended section generally, substituting section catchline for one which read: “Certain dispositions, etc., of section 38 property” and in text substituting present provisions for provisions relating to general rules regarding disposition of section 38 property, nonapplicability of section in certain cases, the treatment of any increase in tax under the section, increases in nonqualified nonrecourse financing, and transfers between spouses or incident to divorce.
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 421(b)(7), added subsec. (e).
Cases: Aeroquip-Vickers v. Commissioner, 347 F.3d 173 (6th Cir. 2004); Salomon Inc. v. United States, 976 F.2d 837 (2d Cir. 1992); Long v. United States, 652 F.2d 675 (6th Cir. 1981)
Final rules 1
(a) General rule
Amended 1969, 1971, 1975, 1976, 1978, 1981, 1982, 1984, 1985, 1986, 1988, 2017
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 13402(a), amended subsec. (a) generally. Prior to amendment, text read as follows: “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.”
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1002(a)(26)(B), struck out at end “If, prior to a disposition to which this subsection applies, any portion of any credit is not allowable with respect to any property by reason of section 168(i)(3), such portion shall be treated (for purposes of this subparagraph) as not having been used to reduce tax liability.”
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1002(a)(26)(C), substituted “168(e)” for “168(c)”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1002(a)(26)(A), added cl. (v).
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1002(a)(27), substituted “section 168(h)(2)” for “section 168(j)(4)(C)”.
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1802(a)(5)(A), added par. (9).
- 1985 Pub. L. 99-121 Pub. L. 99–121 substituted “For property other than 3-year property” for “For 15-year, 10-year, and 5-year property” in table heading.
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 474(o)(8), substituted “under section 39” for “under section 46(b)”.
- 1984 Pub. L. 98-443 Pub. L. 98–443 substituted “Secretary of Transportation” for “Civil Aeronautics Board”.
- 1982 Pub. L. 97-248 Pub. L. 97–248, § 208(a)(2)(B), inserted provision that if, prior to a disposition to which this subsection applies, any portion of any credit is not allowable with respect to any property by reason of section 168(i)(3), such portion shall be treated, for purposes of this subparagraph, as not having been used to reduce tax liability.
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 211(g)(2)(A), inserted provisions relating to disposition, cessation, or change in expected use described in paragraph (5).
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 211(g)(1), (2)(B), added par. (5), redesignated former par. (5) as (6) and substituted “paragraph (1), (3), or (5)” for “paragraph (1) or (3)”. Former par. (6) redesignated (7).
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 211(g)(1), (2)(C), redesignated former par. (6) as (7), substituted “paragraph (6)” for “paragraph (5)”, and redesignated former par. (7) as (8).
- 1978 Pub. L. 95-618 Pub. L. 95–618, § 241(b)(1), added par. (4), redesignated former par. (4) as (5) and substituted “paragraph (2) or (4)” for “paragraph (2)”.
- 1978 Pub. L. 95-618 Pub. L. 95–618, § 241(b)(3), substituted “paragraph (5)” for “paragraph (4)”.
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out in introductory provision and in par. (3)(C) “or his delegate” after “Secretary”.
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 804(b), added par. (7).
- 1975 Pub. L. 94-12 Pub. L. 94–12, § 302(b)(2)(A), (c)(1), added par. (3), redesignated former par. (3) as (4) and substituted “paragraph (1) or (3)” for “paragraph (1)”. A former par. (4), relating to increase or adjustment of tax where property is destroyed by casualty, etc., was repealed by Pub. L. 92–178.
- 1975 Pub. L. 94-12 Pub. L. 94–12, § 302(c)(2), substituted “paragraph (4)” for “paragraph (3)”.
- 1971 Pub. L. 92-178 Pub. L. 92–178, § 107(a)(1), struck out par. (4) relating to property destroyed by casualty, etc.
- 1971 Pub. L. 92-178 Pub. L. 92–178, § 107(b)(1), provided for the repeal of par. (5) with the repeal not to apply, however, in the case of certain replacement property. See section 107(b)(2) of Pub. L. 92–178, set out in the Effective Date of 1971 Amendment note below.
- 1971 Pub. L. 92-178 Pub. L. 92–178, § 102(c), substituted “3½ years” for “4 years”.
- 1971 Pub. L. 91-676 Pub. L. 91–676 added par. (6).
- 1969 Pub. L. 91-172 Pub. L. 91–172, § 703(c)(2), added par. (5).
- 1969 Pub. L. 91-172 Pub. L. 91–172, § 703(c)(1), inserted provision making subpars. (B) and (C) inapplicable to any casualty or theft occurring after April 18, 1969.
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(1) In general For purposes of section 46, for any taxable year during the 5-year period beginning in the taxable year in which a qualified rehabilitated building is placed in service, the rehabilitation credit for such year is an amount equal to the ratable share for such year.
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(2) Ratable share For purposes of paragraph (1), the ratable share for any taxable year during the period described in such paragraph is the amount equal to 20 percent of the qualified rehabilitation expenditures with respect to the qualified rehabilitated building, as allocated ratably to each year during such period.
(b) When expenditures taken into account
Amended 1978, 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(8)(A), inserted “or” at end of par. (1), substituted a period for “, or” at end of par. (2), and struck out par. (3) which related to nonapplicability of subsec. (a) in the case of a transfer of section 38 property related to exchanges under final system plan for ConRail.
- 1978 Pub. L. 95-600 Pub. L. 95–600, § 317(a), added par. (3).
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(1) In general 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.
Amended 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(8)(A), inserted “or” at end of par. (1), substituted a period for “, or” at end of par. (2), and struck out par. (3) which related to nonapplicability of subsec. (a) in the case of a transfer of section 38 property related to exchanges under final system plan for ConRail.
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(2) Coordination with subsection (d) 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).
Amended 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(8)(A), inserted “or” at end of par. (1), substituted a period for “, or” at end of par. (2), and struck out par. (3) which related to nonapplicability of subsec. (a) in the case of a transfer of section 38 property related to exchanges under final system plan for ConRail.
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(c) Definitions For purposes of this section—
Amended 1984, 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1007(g)(3)(A), substituted “D, or G” for “or D”.
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 474(o)(9), substituted “subpart A, B, or D” for “subpart A”.
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(1) Qualified rehabilitated building
Amended 2017
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 13402(b)(1)(A)(ii), (iii), redesignated subpars. (C) and (D) as (B) and (C), respectively, and struck out former subpar. (B). Prior to amendment, text of subpar. (B) read as follows: “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.”
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(A) In general The term “qualified rehabilitated building” means any building (and its structural components) if—
(i) such building has been substantially rehabilitated,
“Substantially” implies facts and circumstances. No regulation cites this provision (eCFR, Oct 19, 2026)
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(ii) such building was placed in service before the beginning of the rehabilitation,
(iii) such building is a certified historic structure, and needs § 47(c)(3)(A)
Amended 2017
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 13402(b)(1)(A)(i), amended cl. (iii) generally. Prior to amendment, cl. (iii) read as follows: “in the case of any building other than a certified historic structure, in the rehabilitation process—
“(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.
(B) Substantially rehabilitated defined
Amended 2017
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 13402(b)(1)(A)(ii), (iii), redesignated subpars. (C) and (D) as (B) and (C), respectively, and struck out former subpar. (B). Prior to amendment, text of subpar. (B) read as follows: “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.”
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(i) In general 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—
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(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.
(ii) Special rule for phased rehabilitation 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”.
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(iii) Lessees The Secretary shall prescribe by regulation rules for applying this subparagraph to lessees.
(C) Reconstruction Rehabilitation includes reconstruction.
Amended 2017
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 13402(b)(1)(A)(ii), (iii), redesignated subpars. (C) and (D) as (B) and (C), respectively, and struck out former subpar. (B). Prior to amendment, text of subpar. (B) read as follows: “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.”
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(2) Qualified rehabilitation expenditure defined
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(A) In general 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,
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(II) residential rental property,
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(III) real property which has a class life of more than 12.5 years, or
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(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.
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(B) Certain expenditures not included The term “qualified rehabilitation expenditure” does not include—
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(i) Straight line depreciation must be used 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).
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(ii) Cost of acquisition The cost of acquiring any building or interest therein.
(iii) Enlargements Any expenditure attributable to the enlargement of an existing building.
(iv) Certified historic structure Any expenditure attributable to the rehabilitation of a qualified rehabilitated building unless the rehabilitation is a certified rehabilitation (within the meaning of subparagraph (C)).
Amended 2017
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 13402(b)(1)(B), amended cl. (iv) generally. Prior to amendment, text read as follows: “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—
“(I) such building was not a certified historic structure,
“(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).”
(v) Tax-exempt use property
(I) In general 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), except that “50 percent” shall be substituted for “35 percent” in paragraph (1)(B)(iii) thereof).
Amended 2008
- 2008 Pub. L. 110-289 Pub. L. 110–289 substituted “section 168(h), except that ‘50 percent’ shall be substituted for ‘35 percent’ in paragraph (1)(B)(iii) thereof” for “section 168(h)”.
(II) Clause not to apply for purposes of paragraph (1)(C) This clause shall not apply for purposes of determining under paragraph (1)(C) whether a building has been substantially rehabilitated.
(vi) Expenditures of lessee 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).
(C) Certified rehabilitation 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.
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(D) Nonresidential real property; residential rental property; class life 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.
(3) Certified historic structure defined
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(A) In general 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.
(B) Registered historic district The term “registered historic district” means—
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(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
“Substantially” implies facts and circumstances. No regulation cites this provision (eCFR, Oct 19, 2026)
(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.
(d) Progress expenditures
Amended 1981, 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 431(b)(2), substituted “Increases in nonqualified nonrecourse financing” for “Property ceasing to be at risk” in heading.
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 211(f)(2), added subsec. (d).
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(1) In general In the case of any building to which this subsection applies, except as provided in paragraph (3)—
Amended 1984, 1986, 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1002(a)(18), substituted “section 46(c)(8)(C)” for “section 48(c)(8)(C)”.
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1844(b)(1), substituted “reducing the credit base (as defined in section 48(c)(8)(C))” for “reducing the qualified investment” and inserted “For purposes of determining the amount of credit subject to the early disposition or cessation rules of subsection (a), the net increase in the amount of the nonqualified nonrecourse financing with respect to the property shall be treated as reducing the property’s credit base (and correspondingly reducing the qualified investment in the property) in the year in which the property was first placed in service.”
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 431(b)(2), substituted provisions relating to increases in tax liability resulting from increases in nonqualified nonrecourse financing for provisions relating to increases in tax liability resulting from the taxpayer ceasing to be at risk with respect to certain property.
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(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.
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(2) Property to which subsection applies
Amended 1983, 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 431(b)(2), substituted provisions that for purposes of par. (1), transfers of debt, or agreements to transfer, occurring more than one year after the initial borrowing shall not be treated as increasing nonqualified nonrecourse financing with respect to the taxpayer for provisions that for purposes of par. (1), such transfers (or agreements to transfer) by a qualified person to a nonqualified person would not cause the taxpayer to be treated as ceasing to be at risk.
- 1983 Pub. L. 97-448 Pub. L. 97–448, § 102(e)(3)(A), substituted “section 46(c)(8)(D)” and “section 46(c)(8)(B)” for “section 48(c)(8)(D)” and “section 48(c)(8)(B)”, respectively.
(A) In general This subsection shall apply to any building which is being rehabilitated by or for the taxpayer if—
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(i) the normal rehabilitation period for such building is 2 years or more, and
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(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.
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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).
(B) Normal rehabilitation period 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.
(3) Special rules for applying paragraph (1) For purposes of paragraph (1)—
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1511(c)(2), substituted “determined at the underpayment rate established under section 6621” for “determined under section 6621”.
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(A) Component parts, etc. 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—
Amended 1983, 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 431(d)(4), substituted “increasing the amount of nonqualified nonrecourse financing (within the meaning of section 46(c)(8))” for “ceasing to be at risk”.
- 1983 Pub. L. 97-448 Pub. L. 97–448, § 102(e)(3)(B), substituted “section 46(c)(8)(F)” for “section 46(c)(8)(E)”.
(i) at a time not earlier than the time at which it becomes irrevocably devoted to use in the building, and
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(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.
(B) Certain borrowing disregarded 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.
Amended 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 431(d)(5), struck out “other than a loan described in section 46(c)(8)(B)(ii)” after “section 46(c)(8)(F)(iv)”.
(C) Limitation for buildings which are not self-rehabilitated
(i) In general In the case of a building which is not self-rehabilitated, 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.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1002(a)(28), substituted “class life (as defined in section 168(i)(1))” for “present class life (as defined in section 168(g)(2))” and “no class life” for “no present class life”.
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(ii) Carryover of certain amounts In the case of a building which is not a self-rehabilitated building, if for the taxable year—
(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.
(D) Determination of percentage of completion 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.
(E) No progress expenditures for certain prior periods 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.
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1844(b)(4), inserted “reduced by the sum of the credit recapture amounts with respect to such property for all preceding years”.
(F) No progress expenditures for property for year it is placed in service, etc. In the case of any building, no qualified rehabilitation expenditures shall be taken into account under this subsection for the earlier of—
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1844(b)(2), struck out subpar. (F) which read as follows: “The amount of any increase in tax under subsection (a) with respect to any property to which this paragraph applies shall be determined by reducing the qualified investment with respect to such property by the aggregate credit recapture amounts for all taxable years under this paragraph.”
(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.
(4) Self-rehabilitated building For purposes of this subsection, the term “self-rehabilitated 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.
(5) Election 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.