This post intends to provide a basic introduction to both federal and state historic tax credits. Because Ogee is based in Austin, this post will emphasize Texas historic tax credits. Many states have historic tax credit programs, but each one is unique.
What is the purpose of historic tax credits?
Historic tax credits, state and federal, are intended to make old buildings economically viable. Historic tax credits are not about restoring historic buildings to their original use and appearance, though certain guidelines must be followed. Instead, tax credits encourage the preservation of original building materials, configurations, and appearance where possible while adapting the building for continued use in the modern world. The credits help offset the additional costs associated with the rehabilitation of historic buildings.
Historic tax credit projects create jobs and stimulate the economy. Because historic projects are more labor-intensive, they provide more jobs than comparable new construction projects. Rehabilitation preserves not only historic buildings, but also precious natural resources. By rehabilitating a building rather than demolishing and building new, historic projects preserve the embodied energy in the building and avoid sending waste to the landfill. Preservationists everywhere know that thegreenest building is the one already built.
What guidelines govern historic tax credits?
Both state and federal historic tax credits rely on the Secretary of the Interior’s Standards for Rehabilitation. These guidelines are used by reviewers to determine whether proposed work is appropriate for a historically significant building. The standards are purposely open ended, such that reviewers can consider each project’s merits individually.
Projects are reviewed according the the Standards and proposed work is considered for its cumulative effecton historic resources. Though the Standards seem open-ended, fortunately, the National Park Service (NPS) providestechnical briefsfor guidance on a wide range of work including masonry restoration, making historic buildings ADA compliant, energy efficiency in old buildings, new construction, and much more.
The federal historic preservation tax incentive program is often called “Rehabilitation Tax Credits” or “Historic Tax Credits”. Since its inception in 1976, the federal historic tax credit program has leveragedover $73 billion in private investment and preserved over 40,000 buildings. In fy2014 alone, the Federal historic tax credit program created:
762 completed projects and $4.32 billion in rehabilitation work certified
The National Park Service (NPS) within the Department of the Interior (DOI) oversee the Federal historic tax credit program. The federal tax credit is applied to your federal income tax for the year in which the project is completed. If needed, the federal credit can be sold to a tax credit investor.
Who is eligible for Federal historic tax credits?
In order to qualify for the federal credit, the rehabilitation project must meet the investment threshold, which is quite high. In order to qualify, the project must be “substantial” meaning that the Qualified Rehabilitation Expenditures (QREs) for the project must equal 100% of the adjusted basis of the property.
- cost of land at purchase
- depreciation taken for an income-producing property
+ cost of capital improvements since purchase
= adjusted basis
For example, if the value of a parcel is $1 million and the value of the building is $500,000, the project would need to require at least $500,000 of work to qualify for the federal tax credit. Only buildings are eligible to receive historic tax credits. Landscapes, bridges, and other structures are not eligible. Projects must be income-producing. Private residences and non-profits are not eligible for the federal credit.
This credit can offset 20% of Qualified Rehabilitation Expenses. To qualify for federal historic tax credits, the building must be historically significant, meaning that the building(s) must be listed individually in the National Register of Historic Placesor a contributing resource to a National Register of Historic Places Historic District. If a building is not presently listed on the National Register, a nomination may be submitted simultaneously with the tax credit applications. Check on the National Register website, the website of the local State Historic Preservation Office, and/or with the city to determine if a property is already listed on the National Register.
Projects must be income-producing, such as retail, offices, or rental housing. Private residences and non-profits are not eligible for the Federal credit.
The Federal credit has a 3-part application process (1,2,3):
Certification that the building is historic. If a building is already individually listed on the National Register, this step is unnecessary. If a building is a contributing resource to a National Register historic district or certified historic district, the Part 1 provides physical description and a short historical narrative to confirm its contributing status. If the building is not yet listed on the National Register, the application can serve as a Determination of Eligibility. A draft National Register nomination may also be submitted as the supporting documentation for a Part 1.
Scope of Work. The Part 2 application includes before photos, plans, specs, and a narrative description of existing conditions and proposed work. Should the scope of work change during construction, amendments to the Part 2 application may be submitted later.
Certification of Completed work. The Part 3 application includes after photos and a short application.
The State Historic Preservation Office (SHPO) reviews each part of the application. The SHPO has 30 days to complete their review before sending the application onto the National Park Service (NPS) for another 30 day review period. Final approval comes from NPS.
The Texas historic tax creditbecame available in January 2015 and is worth 25% of Qualified Rehabilitation Expenses (QREs). The credit is applied to the franchise tax burden. If the ownership entity does not owe a franchise tax, the credit may be sold to an investor. Projects that utilize the Texas credit may also utilize the Federal credit, accounting for tax credits equivalent to 45% of your QREs.