Historic Preservation Tax Credits: What Real Estate Developers Should Know

That crumbling warehouse downtown or abandoned Victorian school might look like a money pit to many. But experienced real estate developers see something entirely different: significant tax savings. Historic preservation tax credits offer a powerful financial tool that can turn challenging rehabilitation projects into profitable ventures while preserving architectural heritage.

What Are Historic Preservation Tax Credits?

The Federal Historic Preservation Tax Incentives program has proven remarkably successful since its creation in 1976. According to the National Park Service, the program has leveraged over $127 billion in private investment to preserve more than 50,000 historic properties. The program approves approximately 1,200 projects annually, generating nearly $6 billion in private investments toward preservation efforts.

Historic preservation tax credits provide real estate developers with percentage-based tax credits for qualified rehabilitation expenses on historic properties. The federal program offers a 20% tax credit for certified rehabilitation projects that comply with preservation standards. This incentive makes otherwise financially unfeasible projects viable by helping close the gap between rehabilitation costs and potential returns.

These credits support a wide range of projects, from boutique hotels and mixed-use developments to apartment conversions and office spaces. Roughly half of all historic tax credit projects have rehabilitation costs under $1 million, with about 20% under $250,000. Additionally, a third of all projects occur in small towns and rural areas with populations below 50,000, demonstrating the program’s broad accessibility to various development scales.

Federal Historic Preservation Tax Credit Program

The backbone of preservation incentives is the Federal Historic Tax Credit (HTC) program, administered jointly by the National Park Service (NPS), the Internal Revenue Service (IRS) and State Historic Preservation Offices (SHPOs). Understanding the qualification criteria is essential for any developer considering this opportunity.

Key Qualification Requirements

To qualify for federal historic preservation tax credits, your project must meet four key requirements:

First, the building must qualify as a “certified historic structure,” meaning it’s either individually listed on the National Register of Historic Places or a contributing building in a registered historic district.

Second, the rehabilitation work must be “substantial,” with costs exceeding the adjusted basis of the building (generally the purchase price minus the value of the land, minus any depreciation, plus improvements already made) or $5,000, whichever is greater.

Third, the property must be income producing when placed in service. Changes within five years of the date placed in service can trigger recapture.

Fourth, all rehabilitation work must adhere to the Secretary of the Interior’s Standards for Rehabilitation, which provide guidelines for preserving historic character while adapting buildings for contemporary use.

Tax Reform Impact

The Tax Cuts and Jobs Act of 2017 changed how developers claim the credit. While previously claimable entirely in the year the building was placed in service, now the credit must be taken ratably over five years. This change affects cash flow projections and potentially impacts how investors structure these deals.

State-Level Historic Preservation Tax Credits

Beyond federal incentives, over 30 states now offer their own historic preservation tax credit programs. These state programs can work alongside federal credits, potentially doubling your tax benefits on qualified rehabilitation expenses.

State historic tax credit programs vary significantly in structure and benefits. For instance, New York offers a 20% tax credit matching the federal program for commercial properties in qualifying census tracts, with enhanced benefits for smaller projects. Illinois provides a 25% state tax credit for certified rehabilitation of eligible properties.

Some states have implemented additional incentives for projects meeting specific criteria, such as including affordable housing components or locating in designated economic opportunity zones. Many state programs align their application process with federal requirements, reducing administrative burden for developers pursuing both credits.

State programs may have unique features regarding credit transferability, which can be particularly valuable. For example, some states allow developers to transfer or sell tax credits to other taxpayers, creating options for developers with limited tax liability or non-profit organizations.

Application procedures also vary. Some states accept applications on a rolling basis, while others have specific submission windows or competitive allocation processes. Michigan, in particular, accepts applications for large commercial projects during specific periods, with credits awarded on a first-come, first-served basis.

Application Process and Documentation

Securing historic preservation tax credits requires navigating a three-part application process administered by the National Park Service in partnership with State Historic Preservation Offices.

Part 1: Evaluation of Significance

The first part of the application process establishes the building’s historical significance. For properties already individually listed on the National Register, this step may be streamlined. Properties within historic districts or those seeking individual listing require comprehensive documentation.

Part 2: Description of Rehabilitation

The second part of the process details all planned work, categorized by architectural elements. This application must demonstrate how the proposed rehabilitation will comply with preservation standards. Submitting this application before beginning work is strongly recommended, as retroactive approval remains uncertain.

Part 3: Request for Certification of Completed Work

The final part verifies that work was performed as described in the approved Part 2 application. The National Park Service reviews the completed project to ensure compliance with rehabilitation standards before issuing final certification.

Documentation and Timing

Documentation requirements include detailed before-and-after photographs, architectural drawings, historical research and comprehensive project specifications. Many developers engage historic preservation consultants to navigate this process successfully.

Timing matters significantly. For the federal credit, submission of the Part 1 application must occur before the building is placed in service. State credit deadlines vary, with some operating on a calendar year basis and others having specific application windows.

Financial Considerations and Deal Structuring

The financial impact of historic tax credits can impact project feasibility. For a $5 million rehabilitation project, the 20% federal credit represents $1 million in tax savings, with potential additional state credits adding hundreds of thousands more.

However, many developers lack sufficient tax liability to utilize the credits fully. This has led to partnership structures where investors with tax liability (often financial institutions) provide capital in exchange for the credits. These “tax credit syndication” arrangements convert future tax credits into upfront equity financing.

The “substantial rehabilitation test” requires rehabilitation expenses to exceed the building’s adjusted basis or $5,000, whichever is greater, within a 24-month period (or 60 months for phased projects). Strategic timing of expenses helps meet this threshold.

Understanding Qualified Rehabilitation Expenditures (QREs) proves crucial for maximizing benefits. QREs typically include construction costs, architectural fees, engineering fees, construction interest and taxes and developer fees. Acquisition costs, new construction, site work and furnishings generally do not qualify.

Maximize Your Historic Preservation Tax Credits

Historic preservation tax credits offer real estate developers a significant opportunity to turn aging buildings into profitable investments while preserving architectural heritage. With federal credits offering 20% of qualified rehabilitation expenses (and many states providing additional incentives), these programs substantially improve project economics.

Capturing these benefits requires understanding regulations, application processes and financial structures. Each step demands careful attention to detail and strategic planning.

Successful developers integrate tax planning into early project conceptualization. By understanding both federal and state requirements, timing applications strategically and structuring deals appropriately, you can leverage these incentives to their fullest potential.

Contact James Moore today to learn how our tax professionals can help you navigate historic preservation tax credits and transform challenging properties into profitable investments.

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