Layman’s Guide to Federal Historic Tax Credits

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In 1978, the government implemented the federal historic tax credit program in an attempt to curb the demolition of historic buildings. The goal of the credit is to incentivize real estate developers to renovate, restore or reconstruct historic buildings. The historic tax credit entitles developers a 20 percent tax credit on eligible improvement expenses.

Often times historical buildings don’t stand the test of time. Crumbling facades, boarded up windows, derelict factories and graffiti often detract from a community, bringing neighboring property values down with it.

The historic tax credit, also called rehabilitation tax credit, is administered by the National Park Service and the Internal Revenue Service with assistance from the State Historic Preservation Offices. Since its inception, the tax credit has been used to revitalize communities by turning old buildings into viable spaces in the community. Over 43,000 historic buildings have utilized the historic tax credit for improvements, generating over 2.5 million jobs and leveraging over $144.6 billion in private investment.

The benefits of historic tax credit for developers is significant. No other tax credit in the United States provides as much incentive to preserve and restore historic sites as the federal historic tax credit.

With 20 percent of investment returned in a tax credit, it’s worth understanding how the historic tax credit works and how developers can benefit from it.

How to qualify for federal historic tax credit

To qualify for the federal historic tax credit the building must be considered “historic” and be listed on the National Register of Historic Places. Further rules stipulate the building must undergo “substantial rehabilitation.” This means the funds spent on rehabilitation must exceed the greater of either:

  • $5,000
  • The adjusted basis of the building and its structural improvements. Generally, the adjusted basis is the purchase price minus the cost of the land, plus improvements already made, minus depreciation already taken.

Improvements to the property that are not directly associated with the historic building itself do not qualify as part of substantial rehabilitation. Improvements to parking areas, landscaping or sidewalks can’t be calculated into the cost of substantial rehabilitation.

Restoring buildings using the historic tax credit often include re-purposing the buildings into community assets like apartments, hotels, educational facilities, museums and theaters.

Several other stipulations exist to qualify for historic tax credit:

  1. The improvements to the building must be completed within 24 month. If the renovation is completed in pre-approval phases, the timeline jumps to 60 months.
  2. The proposed renovations must comply with the Secretary of the Interior’s Standards for Rehabilitation and 36 CFR 67.7.
  3. The building must used as an income-generating property for commercial or residential use. Private residential use by the owner does not qualify for the tax credit.

Recent changes to the historic tax credit

The historic tax credit almost met its demise in December 2017 during the recent tax overhaul. The rules and implementation changed, as stated in public law 115-97 (part five). Under the new legislation, the 20 percent tax credit is distributed equally over a five-year period, beginning when the building is placed in service. Four percent is given each year for five years to cover the 20 percent credit. Prior to this, the entire 20 percent credit was available as soon as the building was ready for occupancy.

The new law also axed the historic tax credit’s sister, which gave a 10 percent tax credit for renovations on any building constructed before 1936. With that gone, the year built doesn’t matter, only the buildings inclusion on the National Register of Historic Places.

The application process for historic tax credit

The application process to qualify for the historic tax credit is broken up into three steps.

Part one is used to present information about the appearance of the building and its historical significance. This includes pictures of exterior and interior as well as maps.

Part two of the application is a description of the current condition of the building and the intended restorations.

Part three is submitted after the project is completed. This step could involve an inspection by staff of the Secretary of the Interior to ensure the construction was completed in accordance with the standards for rehabilitation.

Application timeline

Two copies of the completed application must be sent to the State Historic Preservation Office of whichever state the rehabilitation takes place in. The office typically reviews applications within 30 days. If approved, they will send the second copy to the National Park Service. The National Park Service will also review the application within 30 days, making this a 60-day process.

Get help with your historic tax credit development analysis!

Bullpen helps developers run successful historic tax credit developments. Contact us to learn more about how we can support your underwriting, due diligence, and the development process.

ABOUT THE AUTHOR
Tyler is the Founder & CEO of Bullpen. Before becoming obsessed with proptech, Tyler built a commercial real estate consulting practice that advised some of the largest institutional investment firms on their most important projects. Tyler uses the Bullpen blog to share ideas and resources with readers who will shape the future of commercial real estate.

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