The tax credit for rehabilitation expenditures is available to help offset the costs related to substantially rehabilitating certain buildings. The credit is calculated on the rehabilitation expenditures incurred and not on the acquisition cost of the building itself.

You are a developer who buys, sells, and does construction work on real estate in the inner city of your metropolitan area. A potential customer approaches you about acquiring one of your buildings that easily could qualify for the 20% rehabilitation credit on historic structures. The stated sales price of the structure is $100,000 (based on appraisals ranging from $80,000 to $120,000), and the rehabilitation expenditures, if the job is done correctly, would be about $150,000.

Your business has been slow recently due to the sluggish real estate market in your area, and the potential customer makes the following proposal: if you reduce the sales price of the building to $75,000, he will pay you $175,000 to perform the rehabilitation work. Although the buyer's total expenditures would be the same, he would benefit from this approach by obtaining a larger tax credit ($25,000 increased rehabilitation costs 20% 14 $5,000).

It has been a long time since you have sold any of your real estate. How will you respond?