STATE TAX CREDITS can be sold and the buyer can deduct his purchase price in the year he uses the tax credits, the IRS said again. 

The agency made its latest comments in an internal legal memorandum in late October. A taxpayer could not use historic rehabilitation and low-income housing tax credits in Massachusetts. He sold them for cash to
another taxpayer who could use them. The IRS said the buyer of the tax credits could deduct the amount he paid for them in the year he claimed the credits on his state tax return. The IRS reasoned that the buyer bought “property” — the tax credits — and used the property to pay some of his state taxes. Anyone using
property to extinguish a debt is treated as if he sold the property for cash and then used the cash to pay the debt. That is effectively what happened in this case.

The internal memorandum is ILM 200445046. The IRS issued a similar private letter ruling in 2003. The ruling is PLR 200348002 and involved state income tax credits for renovating an historic property.