The Historic Tax Credit Explained
Developers interested in rehabilitating and repurposing historic buildings may wish to look into the Historic Tax Credit, or HTC program, a federal tax credit program which provides a 20% credit against the cost of rehabilitating eligible historic structures. Over the last 40 years, the program has been responsible for the restoration of numerous historic landmarks, and has lead to more than $140 billion of private investment dollars being funneled into historic rehabilitation projects.
How The Historic Tax Credit Program Actually Works
Investors in qualified historic buildings are permitted to take a 20% tax credit against rehabilitation expenses, but not all expenses qualify. In fact, only qualified rehabilitation expenses (QREs) actually count. QREs generally include all of the operational and maintenance components of a building, such as
Floors, walls, partitions, and ceilings
Doors, windows, stairs, and chimneys
Tiles, paneling or other permanent coverings
Lighting fixtures, electrical wiring, and plumbing components
Elevators, escalators, fire escapes, sprinkler systems
In contrast, expenses which do not qualify for the credit include:
Cabinets, appliances, furniture and tacked carpeting
New decks, porches, fencing, and landscaping
Planters, parking lots, signage, and sidewalks
Financing fees, feasibility studies, leasing costs
Structural demolition costs
However, some development and financing-related fees still qualify; for example, interest and financing on construction loans, and construction management, engineering, and developer fees may also qualify.
Which Buildings Qualify for the Historic Tax Credit Program?
HTC eligible buildings generally include:
Buildings listed in the National Register of Historic Places as a certified historic buildings
Buildings situated in a registered historic district, and certified by the National Park Service as historically significant
Commercial buildings prior to 1936 (however, these only qualify for a 10% Qualified Rehabilitation Expenditures credit)
What are the Rehabilitation Rules for the Historic Tax Credit Program?
Development projects attempting to apply for historic tax credits need to keep in mind that that, in order to be approved, their plan must be consistent with the Secretary of the Interior's Standards for Rehabilitation. Overall, these standards attempt to ensure that a developer makes as few changes as possible to the building, retains the most important historical and architectural elements, and that any work done is essentially restorative in nature.
HTC-eligible properties are generally multifamily apartment buildings, office buildings, warehouses, and industrial buildings, though a wide variety of structures are potentially eligible. However, in order to qualify, properties should have a good chance of generating income and creating jobs in the surrounding community; non-commercial properties like bridges, monuments, and railroad cars do not qualify.
Using the Historic Tax Credit to Invest in Opportunity Zones
The Opportunity Zones program, which was created as a result of the Tax Cuts and Jobs Act of 2017, is one of the most promising federal tax incentive programs available for real estate investors. The program has designated 8,700 Qualified Opportunity Zones across the country, all of which are low-income areas nominated by state or territorial governors and approved by the U.S. Treasury. By investing in real estate located in Opportunity Zones via Opportunity Funds, specialized investment vehicles which must keep at least 90% of their assets invested in Opportunity Zones, investors can defer their capital gains taxes until 2026.
Many Opportunity Zones also overlap significant historical areas, which means that there’s great potential to combine these two tax incentive programs to maximize investment yields. In cities like New Orleans, registered historic districts overlap Opportunity Zones in multiple areas, making it a prime area for HTC/Opportunity Fund redevelopment. In addition, 35 states (including Louisiana) also offer State Historic Tax Credits, which can be used against an investor’s state income tax liability.
Combining Historic Tax Credits and the Low Income Housing Tax Credit (LIHTC)
In addition to combining Opportunity Fund benefits with HTCs, investors may also combine Historic Tax Credits with Low Income Housing Tax Credits (LIHTCs) if they are attempting to rehabilitate a historic multifamily property, such as an apartment building. To qualify, however, they must be willing to make either some or all of the building’s units affordable. LIHTCs provide investors a credit against their federal income taxes in order to encourage affordable housing development across the United States, and, since 1986, has been responsible for the creation of approximately 3 million affordable housing units across the country.