Several years ago, Tom purchased a structure for $300,000 that was placed in service in 1929. Three and one-half years ago he incurred qualifying rehabilitation expenditures of $600,000. In the current year, Tom sold the property in a taxable transaction. Calculate the amount of the recapture of the tax credit for rehabilitation expenditures.

Question

Quizplus · Accepted Answer

The recapture of the tax credit for rehabilitation expenditures is 100% of the credit taken during the first five years after placing the property in service, or a fraction thereof (20% per year) for each year thereafter until year ten (IRS Form 3468). Since Tom sold the property in the current year (less than five years after incurring the rehabilitation expenditures), the recapture amount is equal to the full credit taken, which is 20% of the $600,000 ($120,000). However, since the maximum recapture amount is limited to the gain on the sale, in this case, $120,000 is reduced to $24,000 ($300,000 sales price - $276,000 adjusted basis). Therefore, the correct answer is B) $24,000.

Several Years Ago, Tom Purchased a Structure for $300,000 That