STATE TAX CREDITS can be sold and the buyer can deduct the cost immediately, the IRS said.

STATE TAX CREDITS can be sold and the buyer can deduct the cost immediately, the IRS said.

December 01, 2003
STATE TAX CREDITS can be sold and the buyer can deduct the cost immediately, the IRS said.

An individual qualified for a tax credit against state income taxes for renovating an historic property.  He could not use the tax credit, so he sold it to another individual as allowed by state law.  That individual claimed the credit and used it to reduce his taxes.

The IRS said in a private ruling that the individual who used the credit could not only use the credit to offset his state income taxes, but he could also deduct the amount he paid for the credit against his federal income taxes.

The IRS reasoned that section 164 of the US tax code allows individuals and corporations to deduct the state income taxes they pay.  It might look like the buyer who used the credit ended up not paying any state income taxes.  However, in fact, he bought an item of “property,” the IRS said — the tax credit — and used the property to pay his 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.  The IRS said that is effectively what happened here.

The ruling is Private Letter Ruling 200348002.  The agency made it public at the end of November.

Keith Martin