The rehabilitation of historic structures is generally a costly proposition. In light of this reality, Congress attempted to encourage historic restoration projects by providing that taxpayers can earn federal tax credits by engaging in them. However, the developer who would earn these tax credits often has nowhere near the amount of income that would be needed to take full advantage of the tax credits (or is a tax-exempt entity with no use for tax credits whatsoever). Notwithstanding common parlance in the real estate industry of “buying” and “selling” tax credits, the reality is that tax credits generally cannot be sold.

In order to address this problem, developers engaged in the rehabilitation of historic structures often attempt to take advantage of historic rehabilitation tax credits by entering into a joint venture with a “tax credit investor.” The arrangement is typically structured so that the developer retains most of the economics in the property, while the investor receives the lion’s share of the tax credits in exchange for its investment. In 2011, the Tax Court case of Historic Boardwalk Hall v. Commissioner1 (previously addressed in this column) affirmed the allocation of federal historic rehabilitation tax credits to an investor in this type of transaction. Unfortunately for taxpayers, a recent decision by the U.S. Court of Appeals for the Third Circuit overturned the Tax Court’s decision in Historic Boardwalk. What does this mean for the ability of real estate developers to engage in tax credit transactions?

Tax Credits

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