The Historic Tax Credit
The federal Historic Tax Credit was originally enacted in the form of a credit in 1981 as part of a Reagan Administration economic stimulus package. It encourages the preservation and adaptive reuse of certified historic and older buildings. The HTC is administered jointly by the National Park Service (NPS) and the Internal Revenue Service (IRS) and is comprised of two distinct and separate tax credits: a 20 percent credit and a 10 percent credit. The 20 percent credit applies only to certified historic structures, including buildings that are listed individually on the National Register of Historic Places, or contribute to the significance of National Register Historic Districts. The 10 percent credit is for the rehabilitation of non-historic, non-residential buildings built before 1936.
How to Use Historic Tax Credits
To qualify for either the 20 percent or the 10 percent historic tax credit, the rehabilitation must be “substantial”. A substantial rehabilitation means that a taxpayer’s Qualified Rehab Expenditures during a 24-month or 60-month measuring period (for a phased project) must exceed the “adjusted tax basis” of the building or $5,000, whichever is greater. The adjusted basis is generally defined as the purchase price, minus the cost of the land, plus the value of any capital improvements made since the building acquisition, minus any depreciation already taken. Eligible properties must be income-producing to qualify for historic tax credits; therefore, owner-occupied residences are not eligible.
To qualify for the 20 percent credit, the rehabilitation must also be certified as conforming to the Secretary of the Interior’s Standards for the Treatment of Historic Properties. This certification is achieved by completing a three-part application process which is reviewed first by the state historic preservation office (SHPO) and then by the National Park Service (NPS).
- Part 1 makes the case for National Register property listing or verifies that a property is a contributing structure in a National Register District;
- Part 2 summarizes the scope of the rehabilitation; and
- Part 3 documents that the work has been done as proposed in the approved Part 2.
Virtually all of the rules that apply to the 20 percent historic credit apply to the 10 percent credit with a few notable exceptions. The 10 percent credit requires no design review at the state or federal level, but there is a “wall test” requiring that three of the original four exterior walls remain intact. If this property is located within a historic district, the Part 1 application must be filed and approved by the National Park Service to confirm its non-contributing status. To redeem the 10 percent credit, the developer simply needs to attach Form 3468 to his/her tax return.
The compliance and recapture period for the federal historic credits is five years from the date the property is placed in service. Twenty percent of the recapture risk burns off every year.
According to research conducted by Rutgers University’s Center for Urban Policy Research, the HTC created approximately 86,000 new jobs in FY 2015. Nearly 2.4 million jobs have been created over the life of the program. Furthermore, taken over the life of the program, the HTC is responsible for over $120.8 billion (in 2015 dollars adjusted for inflation) in new investment in our urban and rural communities. The cumulative $23 billion cost of the HTC program is more than offset by the $28.1 billion in federal taxes these projects have generated. In sum, the HTC ensures the preservation of our nation’s historic places, and it does this while creating jobs and increasing federal tax revenue.