Reviving History: How Historic Tax Credits Can Ease Your Tax Burden
Originally published on February 21, 2019
Updated on August 16th, 2022
Do you enjoy the architecture of historic buildings and have a desire to bring them back to their former glory? There is a certain kind of elegance and class historic buildings bring to a community. The problem is all buildings need maintenance and restoration over time, and these costs can be expensive. Thankfully, federal historic tax credits (HTCs) are available to help alleviate your tax burden.
The Federal Historic Preservation Tax Incentives program was created in 1976. The National Parks Service (NPS) and the Internal Revenue Services (IRS) administer the program credit in partnership along with State Historic Preservation Offices (SHPOs).
Using the federal historic tax credit (HTC) could drastically decrease your tax bill while helping the community at the same time. This credit has helped bring back to life famous historic buildings such as the Apollo Theater in New York City, Wrigley Building in Chicago, Fontainebleau Hotel in Miami Beach, and Union Station in Washington D.C.
What is the tax credit?
A 20% income tax credit is offered for the certified rehabilitation of a certified historical structures. (A 10% income tax credit was previously offered for the rehabilitation of non-historic buildings placed in service before 1936. However, it was repealed by the Tax Cuts and Jobs Act on December 22, 2017.)
The historic tax credit is equal to 20% of the qualified cost of the rehabilitation incurred before and during the year in which the property was placed in service. It must be claimed after rehabilitation and is spread out over a five-year period, resulting in a 4% credit each year.
What are the requirements?
The building must be a certified historical structure listed in the National Register of Historic Places or located in a registered historic district. If located in a registered historic district, the building must also contribute to the historic significance of the district.
The credit is only available to historic buildings used for an income-producing purpose such as commercial, industrial, agricultural, rental residential or apartment use. The credit is not applicable to a personal residence, but a partial credit could be allowed for buildings with mixed use. The historic tax credit is subject to recapture if the building is sold or stops becoming income-producing property within five years.
The rehabilitation must also be substantial to be eligible for the credit. The cost of the rehabilitation must exceed the greater of $5,000 or the building’s adjusted basis. The rehabilitation cost must take place in a 24-month period selected by the taxpayer or a 60-month period if completed in phases.
Additionally, the rehabilitation work has to meet the Secretary of the Interior’s Standards for Rehabilitation, as determined by the National Park Services. In addition to ensuring that the property retains physical integrity before renovations, the NPS has designated ten principles to ensure the historic character of a building being rehabilitated is protected:
- A property shall be used as it was historically or be given a new use that requires minimal change to its distinctive materials, feature, spaces, and spatial relationships.
- The historic character of a property shall be retained and preserved. The removal of distinctive materials or alterations of features, spaces, and spatial relationships that characterize a property shall be avoided.
- Each property shall be recognized as a physical record of its time, place, and use. Changes that create a false sense of historical development, such as adding conjectural features or elements from other historic properties, shall not be undertaken.
- Changes to a property that have acquired historic significance in their own right shall be retained and preserved.
- Distinctive materials, features, finishes, and construction techniques or examples of craftsmanship that characterize a property shall be preserved.
- Deteriorated historic features shall be repaired rather than replaced. Where the severity of deterioration requires replacement of a distinctive feature, the new feature shall match the old in design, color, texture, and where possible, materials. Replacement of missing features shall be substantiated by documentary and physical evidence.
- Chemical or physical treatments, if appropriate, shall be undertaken using the gentlest means possible. Treatments that cause damage to historic materials shall not be used.
- Archaeological resources shall be protected and preserved in place. If such resources must be disturbed, mitigation measures shall be undertaken.
- New additions, exterior alterations, or related new construction shall not destroy historic materials, features, and spatial relationships that characterize the property. The new work shall be differentiated from the old and shall be compatible with the historic materials, features, size, scale and proportion, and massing to protect the integrity of the property and its environment.
- New additions and adjacent or related new construction shall be undertaken in such a manner that, if removed in the future, the essential form and integrity of the historic property and its environment would be unimpaired.
How do you apply?
We strongly advise that you consult a CPA, legal counsel, IRS and State Historic Preservation Office (SHPO) before start of any rehabilitation projects.
The application is a three-part process.
- Part 1 – Evaluation of Significance
- Part 2 – Description of Rehabilitation
- Part 3 – Request for Certification of Completed Work
Before preparing the application, contact the SHPO of the state in which the rehabilitation property resides. The SHPO serves as a point of contact, provides technical assistance and advises applicants.
All parts of the application are submitted and reviewed by the SHPO. They may request additional information if necessary and visit the property. Once the SHPO is finished with their review, they send the application to the National Park Service (NPS) with a recommendation
The NPS requires an application fee based on the project cost to review the application and will make the final decision if the project meets the standard for the federal historic tax credit. (You can check the NPS website for more specifics and links to the laws themselves.)
Before you do any of that, however, consult your real estate CPA. An accounting firm with a dedicated real estate team is more likely to be well versed in the requirements of the historic tax credit and the procedures to apply for it.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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