How The Historic Tax Credit Program 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.

Related Questions

What are the benefits of the Historic Tax Credit?

The Historic Tax Credit (HTC) is a 20% federal tax credit designed to encourage investors to fund the substantial rehabilitation of historic structures. Through the program, investors in qualified historic buildings are granted a 20% tax credit against rehabilitation expenses, though not all expenses qualify under the program guidelines. Qualified rehabilitation expenses (QREs) generally include costs associated with 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; and elevators, escalators, fire escapes, and sprinkler systems. With the credit, an investor can take 20% of the project’s qualified costs as a deduction from their federal income taxes.

The benefits of the Historic Tax Credit include:

• 20% tax credit against rehabilitation expenses
• Qualified rehabilitation expenses (QREs) include costs associated with all of the operational and maintenance components of a building
• Investors can take 20% of the project’s qualified costs as a deduction from their federal income taxes

What types of properties qualify for the Historic Tax Credit?

Properties that qualify for the Historic Tax Credit include buildings listed in the National Register of Historic Places as certified historic buildings, and buildings situated in a registered historic district and certified by the National Park Service as historically significant. Commercial buildings prior to 1936 also qualify for a 10% Qualified Rehabilitation Expenditures credit.

Sources:

• The Historic Tax Credit Explained
• The Historic Tax Credit (HTC): What You Need to Know

How do I apply for the Historic Tax Credit?

In order to apply for the Historic Tax Credit, you must first ensure that your property is eligible for the program. Eligible properties include buildings listed in the National Register of Historic Places as certified historic buildings, and buildings situated in a registered historic district and certified by the National Park Service as historically significant. Properties eligible for the HTC program are typically multifamily apartment buildings, office buildings, warehouses, and industrial buildings, though a wide variety of other structures are also potentially eligible. A crucial factor, however, is that properties should have a good chance of generating income and creating jobs in the surrounding community in order to qualify — non-commercial properties such as bridges, monuments, and railroad cars do not qualify for the credit.

Once you have determined that your property is eligible, you must then ensure that your project plan is consistent with the Secretary of the Interior's Standards for Rehabilitation. The purpose behind the standards for rehabilitation is to ensure that a developer makes as few changes as possible to the building — an effort to retain the key historical and architectural elements of the property — essentially ensuring the majority of the work done is restorative in nature.

Once you have determined that your property is eligible and your project plan is consistent with the Secretary of the Interior's Standards for Rehabilitation, you can then apply for the Historic Tax Credit. For more information on the application process, please visit the National Park Service website.

What are the requirements for the Historic Tax Credit?

In order to qualify for the Historic Tax Credit, rehab and improvement expenses need to be more than either $5,000 or the owner's adjusted basis of the building and its structural improvements. A sponsor can calculate adjusted basis by taking the property’s purchase price and subtracting land costs, previous improvements, and previous depreciation. This expenditure needs to occur either over a 24-month period, or a 60-month period for “phased developments.” The project’s sponsor is allowed to determine when this period begins.

In order to qualify, a building must comply with the Secretary of the Interior's Standards for Rehabilitation, which should help encourage an “efficient contemporary use” while retaining parts of the building “which are significant to its historic, architectural, and cultural values." These rules include preserving “distinctive features, finishes, and construction techniques” as well as “examples of craftsmanship that characterize a property.” Overall, minimal changes should be made to the historic elements of property, and improvements should not be made which mislead , or create a “false sense of historical development.”

While multifamily rental properties qualify for the program, an apartment building or home cannot be solely the private residence of the owner— other tenants must also rent the property. A single-family home could be eligible for the HTCs, but it would generally need to be converted into multi-unit residential or commercial space, or be repurposed as a community center, educational center, or another type of income-producing property. Only traditional multifamily residential and commercial buildings are permitted— monuments, bridges, railroad cars, and other miscellaneous structures are not eligible.

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.

What are the tax implications of the Historic Tax Credit?

The Historic Tax Credit Program grants investors a 20% tax credit against rehabilitation expenses, though not all expenses qualify under the program guidelines. Qualified rehabilitation expenses (QREs) generally include costs associated with 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, and elevators, escalators, fire escapes, and sprinkler systems. In contrast, some common expenses do not qualify for the credit, such as cabinets, appliances, furniture, and tacked carpeting, new decks, porches, fencing, and landscaping, planters, parking lots, signage, and sidewalks, financing fees, feasibility studies, leasing costs, and structural demolition costs. Some development and financing-related fees still qualify, such as interest and financing on construction loans, as well as construction management, engineering, and developer fees that may also qualify for the tax credit. Property eligibility for the historic tax credit program includes buildings listed in the National Register of Historic Places as certified historic buildings and buildings situated in a registered historic district and certified by the National Park Service as historically significant. Source

How can I maximize the Historic Tax Credit for my project?

In order to maximize the Historic Tax Credit for your project, you must ensure that your plan is consistent with the Secretary of the Interior's Standards for Rehabilitation. 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. Additionally, 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.

In this article:

1. What is the Historic Tax Credit?
2. How The Historic Tax Credit Program Works
3. Which Buildings Qualify for the Historic Tax Credit Program?
4. What are the Rehabilitation Rules for the Historic Tax Credit Program?
5. Using the Historic Tax Credit to Invest in Opportunity Zones
6. Combining Historic Tax Credits and the Low Income Housing Tax Credit (LIHTC)
7. Related Questions
8. Get Financing