Federal Historic Preservation Tax Credits (HTCs)

Introduction to Federal Historic Tax Credits

Federal Historic Tax Credits (HTCs) are a significant tool for promoting historic preservation and economic development. These credits are provided by the Federal government to incentivize the rehabilitation of historic structures and serve as a valuable tool for real estate developers and investors.

Overview of Federal Historic Tax Credits

The Federal HTC has been in existence since 1976, but its current form, providing a 20% credit, was established by the Tax Reform Act of 1986. The HTC is structured as a dollar-for-dollar reduction in a taxpayer’s liability and is claimed over a five-year period beginning in the year the rehabilitated building is placed in service.

The HTC is a federal income tax credit for the rehabilitation of historic buildings. The credit applies to “certified historic structures,” which are buildings that are either listed individually in the National Register of Historic Places or are located in a registered historic district and certified as contributing to the historic significance of that district.

The credit is equal to 20% of the qualified rehabilitation expenditures. Qualified rehabilitation expenditures include costs associated with the work undertaken on the historic building, architectural and engineering fees, site survey fees, legal expenses, development fees, and other construction-related costs, as long as they are added to the basis of the property and are reasonable and related to the services performed. However, these expenditures do not include the cost of acquiring or furnishing the building, any expenditure attributable to the enlargement of the building, or any expenditure associated with the rehabilitation of a building for tax-exempt use.

Qualification for Federal Historic Tax Credits

To qualify for the HTC, a building must be a certified historic structure. This means it must be either listed on the National Register of Historic Places or located in a registered historic district and certified by the National Park Service as contributing to the historic significance of that district.

The rehabilitation work itself must be substantial, and it must be done according to the Secretary of the Interior’s Standards for Rehabilitation, which are common-sense historic preservation principles in non-technical language.

The cost of the rehabilitation must be greater than the pre-rehabilitation cost of the building, excluding the cost of the land, and the rehabilitation work must be completed within a 24-month period, or within a 60-month period for phased rehabilitations.

Application Process for Federal Historic Tax Credits

The application process for HTCs is a three-part process.

Part 1 of the application determines whether the building is a certified historic structure.

Part 2 evaluates the proposed rehabilitation work to determine if it is in accordance with the Secretary of the Interior’s Standards for Rehabilitation.

Part 3 is submitted after the rehabilitation is complete and requests the final review and certification by the National Park Service.

The application process can be complex and may require the assistance of professionals with experience in historic preservation, real estate development, and tax law.

Legal Complexities of Federal Historic Tax Credits

The legal complexities surrounding HTCs can be significant. To fully utilize the credits, a developer will typically form a partnership with a tax credit investor who can use the credits against their tax liability. These partnerships can be complex and must be structured carefully to comply with IRS regulations.

In addition, the developer must navigate the strict requirements of the National Park Service regarding the rehabilitation work, including the nature of the work, the materials used, and the time period for completing the work. Changes to the rehabilitation plan must be approved in advance by the National Park Service, and failure to comply with these requirements can result in the denial of the tax credits.

Economic Benefits of Federal Historic Tax Credits

Federal HTCs have proven to be a powerful economic development tool. They help to drive economic growth by leveraging private investment for the rehabilitation of historic properties, creating jobs, and revitalizing communities. In addition to the direct economic benefits, these projects often lead to additional indirect benefits such as increased tourism and community revitalization.

Denial

It is important to understand that the credit can be denied if the rehabilitation does not meet the Secretary of the Interior’s Standards for Rehabilitation, or if the building is not a certified historic structure. If a building’s rehabilitation doesn’t conform to these standards or if it doesn’t have the necessary certification, then the rehabilitation tax credit can be disallowed.

The National Park Service reviews applications for certification of rehabilitation and makes the final decision on whether or not a project meets the necessary standards. The application process is three-part: Part 1 presents information about the significance and appearance of the building, Part 2 describes the condition of the building and the planned rehabilitation work, and Part 3 is submitted after the project is complete and documents that the work was completed as proposed. NPS approval of Part 3 certifies that the project meets the standards and is a “certified rehabilitation”. Therefore, if the NPS does not approve the project, the tax credit can be denied.

In general, it is crucial to work closely with the State Historic Preservation Office and the NPS throughout the process to ensure that the rehabilitation plan is aligned with the Standards for Rehabilitation and that the building is a certified historic structure.

Conclusion

Federal Historic Tax Credits are an important tool for the rehabilitation of historic properties. While the process can be complex and may require professional assistance, the economic and community benefits can be significant. By understanding the process real estate professionals can receive significant financial support and ensure the proper renovation of a historic structure.