Section 110. Eligible rehabilitation expenses

A. Eligible rehabilitation expenses are those expenses incurred by a taxpayer in connection with a plan of rehabilitation on or after January 1, 2003, in the material rehabilitation of a certified historic structure and added to the property's capital account.

B. Once the material rehabilitation test is met, the eligible rehabilitation expenses upon which a credit can be claimed include:

1. Expenses incurred prior to the start of the 24-month measuring period as defined in 17VAC10-30-100 A, provided that the expenses were incurred in connection with the rehabilitation plan that resulted in the material rehabilitation of the building;

2. Within the measuring period as defined in 17VAC10-30-100 A; and

3. After the end of the measuring period as defined in 17VAC10-30-100 A but prior to the completion of the project.

C. Amounts are properly chargeable to the capital account if they are properly includable in computing the basis of real property under U.S. Department of the Treasury, Internal Revenue Code, 26 CFR 1.46-3(c). Amounts treated as an expense and deducted in the year paid or incurred or amounts that are otherwise not added to the basis of real property do not qualify. Amounts incurred for historic preservation consultant fees, architectural and engineering fees, certain site fees, and other construction-related costs that are added to the basis of real property satisfy this requirement.

D. Certain expenses are not eligible rehabilitation expenses. These expenses are:

1. The cost of acquiring a building, any interest in a building (including a leasehold interest) or land. Interest incurred on a construction loan the proceeds of which are used for eligible rehabilitation expenditures (and which is added to the basis of the property) is not treated as a cost of acquisition.

2. Landscaping.

3. Site work, including the construction or repair of parking lots, sidewalks, curbing, walls, fencing, pools, patios, etc., except that the cost of certain site work that is part of, and integral to, the building's systems, such as plumbing, mechanical, and electrical, may qualify.

4. Any expense attributable to an enlargement of a building.

a. A building is enlarged to the extent that the total volume of the building is increased. An increase in floor space resulting from interior remodeling is not considered an enlargement.

b. If expenditures only partially qualify as eligible rehabilitation expenditures because some of the expenditures are attributable to the enlargement of the building, the expenditures must be apportioned between the original portion of the building and the enlargement. The expenditures must be specifically allocated between the original portion of the building and the enlargement to the extent possible. If it is not possible to make a specific allocation of the expenditures, the expenditures must be allocated to each portion on a reasonable basis. The determination of a reasonable basis for an allocation depends on factors such as the type of improvement and how the improvement relates functionally to the building.

Example: A historic rehabilitation project includes a new rear wing. A new air-conditioning system and a new roof are installed on the building. A reasonable basis for allocating the expenditures among the two portions generally would be the volume of the historic building (excluding the new wing), served by the air-conditioning system or the roof, relative to the volume of the new wing that is served by the air-conditioning system and the roof.

5. Any expense attributable to the rehabilitation of a certified historic structure, or a building located in a registered historic district that is not a certified rehabilitation.

6. Any expense incurred before January 1, 2003.

7. Any expense not incurred by a taxpayer, including expenses incurred by a local government or any agency thereof, or by any agency, unit, or instrumentality of the Commonwealth.

8. Any rehabilitation expense financed, directly or indirectly, by an obligation of the Commonwealth of Virginia.

9. Any expense paid with insurance or indemnity payments received as a result of a property casualty loss of the property being rehabilitated.

10. Any expense related to personal property or nonessential equipment. Examples include, but are not limited to, removable cabinets, appliances, trade fixtures, and electronic and technology equipment that is not essential for the rehabilitation and basic function of the building, regardless of the specific use of the building.

11. All costs associated with syndication of the tax credits. This includes legal and other business fees related to syndication.

12. Deferred fees or unpaid costs for which there is no charge to a capital account with a corresponding recorded entry to a liability account and either proof of subsequent payment thereof or appropriate documentation evidencing the liability.

E. The taxpayer may take into account eligible rehabilitation expenses created in connection with the same plan of rehabilitation by any other entity with an interest in the building. Where eligible rehabilitation expenses are created with respect to a building by an entity other than the taxpayer and the taxpayer acquires the building or a portion of the building to which the expenses were allocable, the taxpayer acquiring such property will be treated as having incurred the eligible rehabilitation expenses actually created by the transferor, provided that no credit with respect to such qualified rehabilitation expenses is claimed by anyone other than the taxpayer acquiring the property and that the building has not been placed into service prior to the taxpayer's acquisition of the building.

F. A taxpayer who has incurred eligible rehabilitation expenses may elect to treat a tenant or tenants as having incurred these rehabilitation expenses, provided that the lease is for a term of at least five years. This election shall be made on the application for the certification of rehabilitation. For purposes of testing whether a rehabilitation is material, all eligible rehabilitation expenses will be counted. In the event the election is made to treat multiple tenants as having incurred rehabilitation expenses, the allocation of eligible rehabilitation expenses to these tenants shall be made in accordance with the relative square footage occupied by the tenants or the relative amounts of eligible rehabilitation expenses spent in connection with each tenant's space. Eligible rehabilitation expenses that are not readily allocable by specific space shall be allocated in a manner consistent with the allocation method chosen.

Historical Notes

Derived from Volume 22, Issue 13, eff. April 5, 2006; amended, Virginia Register Volume 32, Issue 10, eff. February 10, 2016.

Statutory Authority

§§ 10.1-2202 and 58.1-339.2 of the Code of Virginia.