Tax Credits for Restoring Historic Properties

Property owners looking to restore historic buildings face daunting costs and complex requirements.

Luckily, federal historic preservation tax credits make these projects achievable by covering 20% of qualifying expenses.

This guide explains everything you need to know to successfully utilize these incentives, from eligibility rules to collaborating with government agencies.

Introduction to Historic Preservation Tax Credits

The historic preservation tax credit program was created to incentivize the rehabilitation of historic buildings that contribute to the fabric of communities. By offering tax credits, the program aims to make the restoration of these properties financially viable for owners.

Purpose and Goals of the Program

The main goals of the historic preservation tax credit program are:

• Preserve historic buildings and structures that are important to local communities
• Incentivize private investment into rehabilitating historic properties
• Promote economic development and neighborhood revitalization
• Maintain the historic character of communities by keeping historic buildings in use

The tax credits offset some of the substantial costs involved in rehabilitating and repurposing historic buildings, making these projects more financially feasible for owners. This helps prevent historically significant properties from being demolished or falling into further disrepair.

Key Benefits for Property Owners

The key benefit offered by the program is a 20% federal tax credit for qualifying rehabilitation expenditures. This can help offset project costs by a significant amount.

Additional benefits include:

• Incentives make historic restoration projects more financially viable
• Flexibility to adapt buildings for new uses while retaining historic character
• Promotes long-term preservation of historic properties
• Can be combined with state/local incentives for even greater savings

The tax credits allow owners to recoup some of the costs over time while still achieving their goals for the property, whether it be affordable housing, commercial space, or other uses.

How does the federal historic tax credit work?

The federal Historic Tax Credit provides a 20% income tax credit for rehabilitating historic, income-producing buildings that are listed in the National Register of Historic Places. This tax incentive aims to promote the preservation and reuse of historic structures.

To qualify for the 20% tax credit:

• The property must be a certified historic structure. This means it's listed in the National Register of Historic Places individually or as a contributing building within a historic district.
• The rehabilitation project must follow The Secretary of the Interior's Standards for Rehabilitation. These guidelines help preserve the historic character of the building during renovations.
• Rehabilitation expenses must exceed the greater of $5,000 or the adjusted basis of the property. These expenses qualifying for the tax credit are called Qualified Rehabilitation Expenditures (QREs).

Once completed, the rehabilitation project must be certified by the National Park Service. The tax credits are then claimed on income tax returns for the year the rehabilitated property is placed in service.

The federal Historic Tax Credit incentivizes private investment to rehabilitate historic buildings. This brings old structures up to modern needs while retaining their historic fabric. The program has leveraged over $84 billion in private investment to preserve 38,000 historic properties since its inception.

Which is a positive incentive of the National Park Service's historic preservation tax incentive program?

The National Park Service's historic preservation tax incentive program offers several benefits for those who invest in rehabilitating certified historic structures. One of the key positives is a 20% tax credit that can be claimed on qualifying rehabilitation expenditures.

This 20% tax credit serves as an attractive incentive for property owners and developers to take on historic preservation projects. By offsetting a portion of the costs, it makes rehabilitating and repurposing historic buildings more feasible from a financial perspective. The tax credit can often tip the scales to make these projects viable investments.

In addition to the direct 20% tax savings, rehabilitating historic properties can also increase property values and generate additional tax revenue down the line through increased income, property, and other taxes. It also creates construction jobs and spurs economic activity in the process.

Ultimately, the 20% rehabilitation tax credit creates a win-win situation - enabling the preservation of historic buildings that contribute to community character, while also encouraging investment in older properties that might otherwise remain vacant or underutilized. The program demonstrates that historic preservation can align with both economic and community revitalization goals.

What is the adjusted basis for the historic tax credit?

The adjusted basis is an important component in determining eligibility for the Historic Tax Credit (HTC). It helps establish whether a rehabilitation project qualifies as a "substantial rehabilitation", which is required to claim the 20% tax credit.

Specifically, the adjusted basis refers to the cost basis of the building, excluding the value of the land. To calculate it:

• Start with the purchase price or original cost basis of the property
• Subtract the value attributed solely to the land
• Add in any capital improvements made over the years
• Subtract any depreciation taken

This helps isolate the depreciable assets tied directly to the building itself. Generally, an accountant can help property owners determine the adjusted basis accurately.

The substantial rehabilitation test requires that rehab expenses exceed the greater of $5,000 or the adjusted basis of the historic building. Meeting this threshold demonstrates significant investment into restoring the structure.

In summary, determining the adjusted basis is a key step for any property owner considering HTC incentives. It sets the bar for qualifying levels of rehabilitation spending. With an accountant's help, owners can properly calculate their adjusted basis and assess feasibility of meeting substantial rehabilitation requirements.

What is the measuring period for the rehabilitation credit?

The measuring period for the rehabilitation tax credit refers to the timeframe over which qualified rehabilitation expenditures (QREs) are tracked to determine if a historic building project qualifies for the 20% tax credit.

According to the National Park Service guidelines, you can select a 24-month period ending within your taxable year to serve as the "measuring period" for calculating if your QREs exceed the greater of:

• The adjusted basis of the historic building and its structural components
• $5,000

If your QREs surpass this threshold during the 24-month measuring period you chose, then your rehabilitation project generally qualifies as "substantially rehabilitated" and you can claim the 20% tax credit.

Some key points about the measuring period:

• You can select any 24-month period ending within your taxable year to be the measuring period
• The 24-month period does not have to align with the start and end dates of the actual rehabilitation project
• If the project spans multiple tax years, you can have separate measuring periods for each year
• The measuring period standard applies both to owner-occupied properties and properties held for the production of income

In summary, the 24-month measuring period is a flexible timeline you define to quantify your qualified rehabilitation expenses for the historic tax credit. As long as your QREs exceed the adjusted basis amount during those 24 months, your project will likely qualify for the substantial rehabilitation requirements.

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Understanding the 20% Tax Credit Basics

The 20% tax credit provides an incentive for rehabilitating historic buildings that will be used for income-producing purposes such as commercial, industrial, agricultural, or rental residential. To qualify, the building must be certified as a historic structure by the National Park Service and undergo substantial rehabilitation according to preservation standards.

What Qualifies for the 20% Credit

The 20% tax credit applies specifically to certified historic structures that will be adapted for new commercial, industrial, agricultural, or rental residential uses after rehabilitation. The structure must be listed on the National Register of Historic Places either individually or as a contributing building within a historic district. The rehabilitation project must also meet the following requirements:

• Substantial Rehabilitation Test: Rehabilitation expenditures must exceed the greater of $5,000 or the adjusted basis of the building.
• Income-Producing Use: The rehabilitated building must be used for commercial, industrial, agricultural, or rental residential purposes for at least 5 years after placing the building in service. Owner-occupied residential properties do not qualify.
• Compliance with Standards: Rehabilitation work must comply with the Secretary of the Interior’s Standards for Rehabilitation, as determined by the National Park Service. This helps ensure the historic character of the building is preserved.

Certification Process and Requirements

To qualify for the 20% tax credit, property owners must complete a three-part application process administered by the National Park Service and their State Historic Preservation Office:

• Part 1 – Evaluation of Significance: This confirms whether the building contributes to the historic significance of a registered historic district or is individually listed on the National Register of Historic Places.
• Part 2 – Description of Rehabilitation: Property owners must describe all planned rehabilitation work to allow the NPS to review compliance with the Secretary’s Standards.
• Part 3 – Request for Certification of Completed Work: After completing the project, owners certify that the work was done as described in Part 2 and request final certification.

Throughout the process, owners must submit historical documentation about the building and detailed information on rehabilitation costs. Receiving final certification is required before claiming the 20% tax credit.

Eligibility Requirements for Historic Preservation Tax Credits

Historic properties must meet several key criteria to qualify for the 20% rehabilitation tax credit. These requirements ensure that the tax credits support projects that follow appropriate preservation standards and contribute meaningful benefits to communities.

Listing on the National Register of Historic Places

To qualify for the tax credits, a property must be listed on the National Register of Historic Places, either individually or as part of a registered historic district. The National Register recognizes buildings, structures, sites, objects, and districts that reflect important aspects of American history. State Historic Preservation Offices assist property owners with preparing National Register nominations.

Meeting The Secretary's Standards for Rehabilitation

Proposed projects must adhere to the Secretary of the Interior's Standards for Rehabilitation, which provide guidance for retaining and preserving historic materials and features. These Standards ensure that key aspects of a property's historic integrity and character are maintained through the rehabilitation process. Meeting these Standards is mandatory for tax credit eligibility.

Understanding Qualified Rehabilitation Expenditures (QREs)

The tax credits apply specifically to Qualified Rehabilitation Expenditures (QREs), which encompass expenses related to structural work, architectural and engineering fees, site work, legal expenses, development fees, and other construction costs. QREs do not include acquisition, furnishings, or new additions. Carefully tracking QREs is vital for documenting tax credit eligibility.

The Historic Preservation Certification Application

To confirm a project's eligibility and qualify for the tax credits, property owners must submit a Historic Preservation Certification Application to the National Park Service. This detailed application requires documentation on the property's historic significance, detailed project plans and specifications, qualifications of key personnel, and photographic conditions assessments. Approval of this application is required before project work begins.

Gaining familiarity with these eligibility requirements is key for successfully obtaining historic preservation tax credits. When thoughtfully followed, these requirements help ensure that rehabilitation projects respect historic integrity while also promoting community revitalization.

Maximizing Tax Credits in Different Project Scenarios

Historic preservation tax credits provide incentives for restoring historic properties in various scenarios. Here are some examples of how different types of projects can benefit.

Restoring Historic Properties for Affordable Housing

Converting historic buildings into affordable housing helps revitalize communities while preserving cultural heritage. 20% tax credits can make these projects financially viable by offsetting renovation costs. For instance, a non-profit organization transformed a century-old school in a low-income neighborhood into 30 affordable apartments using tax credits.

Adapting Industrial Properties for New Use

Old warehouses, factories, and commercial buildings often have architectural significance despite functional obsolescence. Tax credits support adaptive reuse projects like converting these structures into loft apartments, retail spaces, restaurants, boutique hotels, event venues, co-working spaces, art galleries, community centers, and more. One example is a former steel mill that now houses artist studios and creative businesses after a substantial rehabilitation leveraging preservation tax credits.

Revitalizing Neighborhoods through Community Centers and Services

Restoring historic structures as public amenities fosters community engagement. Non-profits can utilize tax credits to transform historic assets like schools, post offices, libraries, theaters, and religious buildings into multi-purpose hubs offering childcare, job training, healthcare services, performance venues, and recreation space. These projects allow preservation-based neighborhood revitalization.

Disaster Recovery and Historic Preservation

Natural disasters often damage historic structures. Preservation tax credits help finance the sensitive restoration of storm-damaged historic buildings. For instance, projects aiming to rebuild and reuse historic structures in disaster-declared areas may couple Federal Emergency Management Agency public assistance grants with rehabilitation tax credits.

Green Rehabilitation Projects

Sustainable building practices can be integrated into historic rehabilitations. Many states offer tax credits to incentivize green rehabs meeting environmental standards. Solar panel installation, high-efficiency HVAC systems, stormwater management, drought-tolerant landscaping, and recycling building materials during renovations are some examples. This allows historic preservation to align with ecological responsibility.

Planning Successful Projects with Historic Preservation Tax Credits

Historic preservation tax credits can provide significant incentives for rehabilitating historic properties, but projects require careful planning and expertise to maximize benefits. Here are some key tips for assembling the right team, budgeting properly, and navigating program requirements smoothly.

Assembling the Right Project Team

A strong project team is crucial when undertaking historic rehabilitation projects using tax credits. Key team members should include:

• Historic preservation consultants: Provide guidance on meeting Secretary of Interior's Standards and navigating National Park Service review/approval process.
• Architects: Design plans sympathetic to historic character while accommodating new uses.
• Engineers: Assess structural needs and develop solutions compatible with preservation standards.
• Developers/contractors: Experienced working on certified historic rehabs to handle unique needs.
• Tax credit consultants: Advise on qualifying expenses, compliance issues, financing options to capture credits.
• Accountants/attorneys: Provide specialized tax, financing, legal expertise regarding use of credits.

Assembling this interdisciplinary team early in the planning process allows for designing an optimal project to leverage available incentives.

Allowing Sufficient Time and Budget

Pursuing historic tax credits involves a lengthy, multi-phase application and review process requiring sufficient planning:

• Typical timeline: 12+ months from initial application to final certification.
• Multiple reviews: State/National Park Service review proposals at different stages.
• Staged funding: Securing intermediate financing can be necessary to complete phases before credits are awarded.
• Professional fees: Survey costs, architect/consultant fees, legal fees should be budgeted.
• Contingencies: Unanticipated costs related to preserving historic features can arise.

Properly estimating timeframes and costs well in advance makes executing projects smoother and avoiding unexpected issues.

Navigating Tax Exempt and Lessee Issues

Tax-exempt entities and lessees using historic properties face additional considerations:

• Tax-exempt entities: Cannot directly use credits but can partner in ownership structures to transfer credits.
• Lessees: Rehabilitation expenses qualify only if term of lease is 39+ years after project completion.
• Transfers: Development agreements must be structured properly to capture credits.

Specialized legal and tax advice is recommended to navigate these complex issues successfully.

Avoiding Recapture and Ensuring Compliance

Meticulous compliance is vital to qualify and prevent tax credit recapture:

• 5 Year Compliance: Properties must be maintained consistent with historic certification for at least 5 years after claiming credits or credits may be recaptured.
• Qualified expenses: Construction cost documentation must substantiate expenses qualifying for credit.
• Scope changes: Alterations to approved plans can risk recapture without proper amendments and approvals.

Careful record-keeping, reporting, and long-term stewardship is key to demonstrating ongoing compliance and successfully securing the value of credits.

Following proper procedures with the help of expert advisors can make all the difference in unlocking the potential value of these incentives for rehabilitating historic buildings.

Collaborating with Government Agencies and Cultural Resources

The successful completion of historic preservation projects often requires working closely with various government agencies and cultural resources organizations. Their involvement helps ensure compliance with regulations, proper documentation, and access to expertise that support these complex undertakings.

Role of State Historic Preservation Offices

State Historic Preservation Offices (SHPOs) play a key role in overseeing applications for historic preservation tax credits. They:

• Provide guidance on eligibility requirements and documentation needs
• Assist with completing Historic Preservation Certification Applications
• Review project plans to ensure compliance with preservation standards
• Inspect construction work at various stages
• Issue certifications required for the tax credit

Maintaining open communication and following SHPO guidelines are essential to smooth approvals.

Working with the National Park Service

While SHPOs handle state-level administration, the National Park Service (NPS) sets overall standards and policy direction for historic preservation projects seeking tax credits. Areas where the NPS assists include:

• Determining if properties qualify for the National Register of Historic Places
• Defining standards for rehabilitation work under the Secretary's Standards
• Providing technical publications, training, and other guidance

Tapping into the NPS's extensive expertise can help identify eligible properties and plan compliant projects.

Documentation Requirements and the Internal Revenue Service

Meticulous project documentation is vital for securing tax credits from the Internal Revenue Service (IRS). Key documentation includes:

• Photographs showing "before" condition and rehab progress
• Architectural plans and specifications
• Evidence of qualified rehabilitation expenditures

Maintaining thorough records facilitates IRS review and helps demonstrate program compliance.

Engaging with the Cultural Resources Partnerships and Science Directorate

For complex projects, the NPS's Cultural Resources Partnerships and Science Directorate provides specialized consultation and know-how. Their experts assist with:

• Establishing historical significance
• Developing treatment and preservation plans
• Assessing sustainability and environmental compliance
• Integrating modern amenities while retaining historical integrity

Tapping into this directorate's expertise further enriches preservation projects eligible for tax credits.

Final Thoughts and Additional Resources

Article Summary and Key Takeaways

Historic preservation tax credits provide significant financial incentives for rehabilitating historic buildings. By understanding the basics around eligibility, requirements, and application process, property owners can take advantage of up to 20% in federal tax credits plus additional state credits.

Key takeaways include:

• Tax credits can apply to income-producing certified historic structures as well as some non-historic buildings built before 1936
• Work must comply with rehabilitation standards to avoid recapture of the credits
• An application process is required along with documentation of qualified rehabilitation expenditures
• Tax credits can help offset costs to adapt historic buildings for continued use or new purposes

Careful project planning and expertise is key to successfully utilizing these incentives for affordable housing, community revitalization, recreation, and more.

Helpful References for Further Reading

• National Park Service Technical Preservation Services: Detailed historic preservation tax credit guides and resources
• IRS Form 3468: Historic Preservation Certification Application form
• State HPF Offices: Find state organizations assisting with tax credit projects
• Advisory Council on Historic Preservation: Additional info on implementing successful tax credit projects

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