Question

B purchased an old textile factory building in Chicago that had been certified as a historic structure. The purchase price was $1 million, and he spent $3 million this year renovating it. B’s tax credit [without regard to possible limitations imposed by § 38(c)] and his basis in the building are a. $60,000 credit; $4 million basis. b. $300,000 credit; $3,700,000 basis. c. $600,000 credit; $3,400,000 basis. d. $600,000 credit; $400,000 basis.

Answer 1

$600,000 credit; $3,400,000 basis. (which is Option C)

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Explanation:

As per the applicable rules, the amount of credit that can be availed for approved/certified historic structures is 20% of the qualified rehabilitation expenditures. Cost/Purchase price of the property is not treated as a part of qualified rehabilitation expenditures. Therefore, the tax credit would be available on $3,000,000 incurred on renovation of the factory. The tax credit would be $600,000 (3,000,000*20%). The basis would be calculated with the use of following formula:

Basis = Cost + Expenditures Incurred on Renovation - Tax Credit = 1,000,000 + 3,000,000 - 600,000 = $3,400,000

The correct answer is Option C.