Historic tax credits provide the opportunity to enjoy the double bottom line of doing well while also doing good. Written into the federal tax code as the United States turned 200 in 1976, tax incentives for rehabbing old buildings have become a major catalyst of community revitalization across the country.
Their application is limited only by the investing community's creativity. The National Trust for Historic Preservation has a page of success stories that include such varied projects as a lodge in northern Michigan, a theater in Norfolk, Virginia, and a train depot turned TV station in Omaha, Nebraska. The credits also are frequently used for residential projects. In fact, the National Trust says they've been used to renovate more than 260,000 housing units.
The historic rehabilitation tax credit (HTC) program provides a 20% credit taken ratably over five years, beginning in the tax year in which the building is placed in service. The Tax Cuts and Jobs Act of 2017 eliminated the previous 10% rehabilitation credit for pre-1936 buildings, with some grandfathering in of relief.
The historic tax credit provides for a dollar-for-dollar reduction of federal income tax liability, unlike a tax deduction, which lowers how much of your income is taxable. The dollar value is calculated as a percentage of the qualified rehabilitation expenditures (QREs) incurred during the course of the tax credit project's work.
That said, there's a lot of paperwork and process involved in becoming a certified historic structure eligible for the rehabilitation tax credit. These are buildings listed on the National Register of Historic Places or in local or state districts that the Secretary of the Interior has certified. Ultimately, approval is up to the National Park Service.
Parks and preservation
The National Park Service (NPS) is about more than providing homes for moose and monuments. The NPS is the federal government's source of historic tax credits through the Federal Historic Preservation Tax Incentives Program. That's the formal name. It's also commonly called the Federal Historic Tax Credit Program, and investors have to apply to the NPS to earn certified historic structure designation for their properties.
The NPS says more than 43,000 such tax credit projects have been completed in the past 40 years, adding $6.2 billion in gross domestic product in fiscal year 2017 alone. Those four decades have also produced more than $144 billion from tax credit investors using private money for historic rehabilitation projects.
The federal government isn't alone in offering preservation tax incentives. State historic tax credit programs and state historic preservation offices typically reflect their national counterparts. There are more than 35 of these tax credits currently available, and the Novogradac professional services firm provides a user-friendly list.
There also are other providers of tax incentives for rehabbing historic and non-historic residential and non-historic nonresidential buildings that can further reduce the tax bill and incentivize investment. Check with your local planning commissions and historic organizations for details.
They may be able to help you with projects that qualify for tax breaks through the New Markets Tax Credit Program sponsored by the Treasury Department's Community Development Financial Institutions Fund or the Low Income Housing Tax Credit from the U.S. Department of Housing and Urban Development.
The IRS in rehab
As you can imagine, working with the rehabilitation tax credit and its ultimate arbiter -- the Internal Revenue Service (IRS) -- includes engaging with a long list of rules and terms. The above-mentioned Novogradac consultancy also offers a nice online lexicon for reference.
Meanwhile, let's revisit one term particularly useful to memorize now for investors considering a dip in the preservation pond: qualified restoration expenditures (QRE). QREs are the expenses eligible for consideration when calculating the dollar-for-dollar reduction in taxes. They include physical construction costs but extend beyond that to items such as legal and architectural fees and even taxes and interest on construction financing.
If you want to read the rules in their entirety, check out the Treasury Regulation Section 1.48-12 in the Federal Register and IRS Code Section 47, the rehabilitation credit section.
Before investing, you also might want to consider what it will take to meet the rules for the preservation process, such as preserving adobe windows and maintaining historic wooden windows. The NPS maintains a series of Preservation Briefs online about that, as do individual states and other entities. Here's an example from the South Carolina Department of Archives and History.
For further research, check out Form 3468, Investment Credit. That's what the IRS requires for investors seeking to use the rehabilitation credit. (Interestingly, it also includes rules for advanced coal and gasification projects.)
And the IRS itself provides a 41-item FAQ about the rehabilitation tax credit, covering everything from who can claim the credit, how to pass it on to the measuring period and how to avoid recapture of the credit and what to do if a hurricane or other natural disaster swallows up the whole thing before the full credit is realized.
The double bottom line
Investing in historic preservation, whether residential or commercial, can be a great way to help build the local economy and your own, providing aesthetic and monetary satisfaction as the project comes to fruition and beyond. The opportunity to save on taxes just adds to that double bottom line of doing well while also doing good.