Federal Historic Preservation Tax Credits
Rehabilitating a historic building can be an expensive undertaking. For income-producing buildings, the federal government offers a historic tax credit to help offset some of the costs. A 20% tax credit is available to owners of historic buildings with projects that meet the qualifications. Not every old building will qualify, but for those that do, tax credits can help defray the cost of a rehabilitation and/or attract equity to the project. The tax credit is jointly administered by the National Park Service and the IRS.
To take advantage of the federal historic tax credits, the following must be true:
1. The building must be what NPS terms a “certified historic structure” This is essentially any building individually listed on the National Register of Historic Places, or which contributes to the significance of a historic district. Often, the first step in a historic tax credit project is listing the building to the National Register.
2. The building must be used for income-producing purposes. This means that private homeowners and non-profit organizations are not eligible for the federal historic tax credit. However, a handful of states do offer state tax credits to homeowners (Pennsylvania is not one of them, sorry!) and non-profits can take advantage of historic preservation grants.
3. The rehabilitation must be considered “substantial”. A substantial rehabilitation is a project where the qualified rehabilitation expenditures (QRE’s) exceed the adjusted basis of the building. QRE’s include the cost of work done on the historic building, not costs associated with new additions or other new construction. The adjusted basis is determined by taking the value of the property and subtracting the cost of the land and building depreciation.
4. The project must follow the Secretary of the Interior’s Standards for Rehabilitation. A project meets the Standards when work does not harm the property’s historic character.
5. The building owner must retain the property for at least five years after completing the tax credit project. The tax credit is taken ratably over the five years following the completion of the project.
To receive historic tax credits, an application must be submitted first to the state Historic Preservation Office (SHPO), then to the NPS. The application is completed in three parts.
Part 1 documents that the building is a certified historic structure. Buildings listed on the National Register of Historic Places are automatically considered certified historic structures and do not need to complete a Part 1. Projects located within a historic district use a Part 1 to demonstrate that the building contributes to the character and significance of the historic district.
Buildings not yet listed on the National Register will need to have begun the first step in National Register listing, a Determination of Eligibility, before a Part 1 can be completed. The building must be formally listed to the National Register before the project is complete.
Part 2 explains the scope of work for the proposed project and demonstrates that the project meets the Standards for Rehabilitation. This is done through existing, demolition and proposed drawings, specifications, photographs, narrative descriptions, and if required, window surveys.
Part 3 is submitted when construction concludes. Part 3 documents that the work was completed as described in the Part 2 application. After Part 3 is approved, the tax credit can be claimed.
The application process itself can be lengthy and sometimes frustrating, as reviews of what meets the Standards for Rehabilitation are not black and white. Hiring an architect who has worked with historic tax credits before and a separate historic tax credit consultant can help streamline the process and make sure that all requirements have been met.
Often historic tax credits are “stacked” with other revitalization tax credits, such as the Low-Income Housing Tax Credit (LIHTC) and state historic tax credits. These tax credits make otherwise impossible projects feasible, reusing old buildings and revitalizing struggling neighborhoods.
