Commercial Revitalization Deduction

Are there any incentives for commercial building investment in a RC?
In 2000, Congress created a new "commercial revitalization deduction" (CR Deduction) that is intended to increase economic development in RCs. The incentive is a deduction from income before calculating Federal income tax liability, and provides a way to deduct costs on an accelerated basis.

Are there limits on the deduction?
The amount of the deduction is subject to a State limitation of up to $12 million of "commercial revitalization expenditures" (CREs) for each RC located within a State for each calendar year after 2001 and before 2010. In addition, the CREs for a particular building cannot exceed the actual qualifying costs and there is an overall limit per building of $10 million.

Is the CR Deduction available only for new construction?
The deduction is calculated on the basis of qualifying CREs. CREs include the depreciable costs of a new building or the costs associated with an existing building that is substantially rehabilitated. Substantial rehabilitation means that, within a 24-month period, rehabilitation expenditures exceed the greater of the adjusted basis of the building (and its structural components) or $5,000. For purposes of determining whether a building has been substantially rehabilitated, rehabilitation expenditures do not include enlarging a building. If the substantial rehabilitation test is met (without taking into account the costs of expansion), the cost of expanding the building could qualify as a CRE.

To what extent do building acquisition costs qualify for the CR Deduction?
A taxpayer can include the cost of the building acquisition in taking a CR Deduction, but only to the extent that the acquisition cost does not exceed 30 percent of the aggregate qualifying CREs (determined without regard to the acquisition cost). For example, if the building cost $500,000 to acquire and renovations eligible for CREs were $1 million, up to $300,000 of the acquisition cost could qualify as a CRE.

Could an investor obtain special tax advantages for land speculation in an RC?
The CR Deduction is permitted only for the cost of acquiring a building and rehabilitating it, not for land costs. Acquisition of land for speculation would not qualify.

Is the CR Deduction available for residential rental property?
The building must be used for commercial purposes, so a residential rental property would not qualify. However, if a developer were to provide commercial facilities at or near the residential rental property, these expenditures might be eligible, assuming the commercial development is located in a RC.

Who will make the allocation of the CR Deduction?
This incentive requires that each State identify an entity to act as the community revitalization agency (CRA). The CRA will develop the procedures for allocating the $12 million in CR Deductions permitted for each RC.

How can a developer determine if a particular project might be competitive for obtaining the CR Deduction?
The CRA must develop a plan for allocating the CR Deduction and must submit the plan to a public hearing. The plan must then be approved by the governmental unit of which the RC is a part. The Federal statute provides guidelines for the qualified allocation plan, requiring the CRA to take into account full-time jobs created by the project, active community involvement and contribution to the implementation of the Strategic Plan of the RC. The developer of a potential project should obtain a copy of the plan to determine the priorities of the CRA where the project might be located.

What is the accelerated period for the CR Deduction?
The taxpayer may elect one of two permitted accelerated deduction methods. A taxpayer can elect either to (a) deduct one-half of the CREs for the taxable year the building is placed in service or (b)
amortize all the CREs ratably over a 120-month period beginning the month the building is placed in service. The method selected will depend on a taxpayer's particular tax situation. This special deduction provision would be in lieu of depreciating the property over a period up to 39 years.

What if the building was purchased and renovated prior to RC designation?
The CR Deduction is available only to buildings placed in service after the RC designation and before January 1, 2010. If the building was purchased before RC designation, but the renovation was not completed until after RC designation, the renovation expenditures would be treated as a separate building for purposes of determining when it was placed in service and could qualify for the CR Deduction on that basis.

What other tax consequences arise from using the CR Deduction?
No depreciation is allowed for amounts deducted as CR Deduction. The adjusted basis of the building is reduced by the amount of the CR Deduction, and the deduction is treated as a depreciation
deduction in applying the depreciation recapture rules.

Does a CR Deduction affect Alternative Minimum Tax (AMT) liability?
The CR Deduction is allowed as a deduction in computing a taxpayer's AMT income.

Do the passive loss limitation rules apply to the CR Deduction?
The CR Deduction is treated in the same manner as the Low-Income Housing Tax Credit in applying the passive loss rules. That means that an individual taxpayer can have up to $25,000 of passive activity deductions (the CR Deduction together with the other deductions and credits not subject to the passive loss limitation), regardless of the taxpayer's adjusted gross income. Corporations are not subject to the $25,000 passive loss limitation.