Explaining Historic Tax Credits

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For as many places of life and energy you see throughout your community, you also see places of what once was. These run-down buildings often sit in prime urban areas, but are neglected by developers due to the high cost of bringing them up to code. The result is not only an eyesore to the community, but also a loss of opportunity. Enter Historic Tax Credits (HTCs), which incentivize developers to reinvest in these spaces and restore life to those areas.

What are Historic Tax Credits?

The Historic Tax Credit Program was developed by the National Park Service (NPS) and Internal Revenue Service (IRS) in 1976 as a way of facilitating the reuse of our country’s most historic properties and stimulating local economies. When a developer completes a rehabilitation project on a certified historic structure, the federal government will award HTCs equal to 10 or 20% of the development cost.

Let’s look at a very simple example:

  • You spend $750,000 redeveloping a certified historic property
  • You receive 10% of the cost in HTCs, equaling $75,000
  • Your annual federal income tax is $75,000
  • Your credits offset the taxes, so your final due is $0
  • Building Renovation Costs $750,000
  • Income Tax — 2018 (approx. 10% of cost) $75,000
  • Historic Tax Credit -$75,000
  • Federal Taxes Owed $0

What buildings are eligible for a Historic Tax Credit?

Not every old building is eligible for an HTC. To qualify for the credits, a property must produce income or be used by an income-producing organization. The property must also be considered historic or have been built before 1936.

A property is considered historic if:

  • It is listed in the National Register of Historic Places
  • It is proven to contribute to a historic district listed in the National Register of Historic Places or local historic district

These conditions also determine the amount of HTCs awarded. If the building meets the above historic standards, the redevelopment is eligible for a 20% HTC. If not, the building may still be eligible for a 10% HTC if it was built before 1936 and your redevelopment creates income.

 

How is a Historic Tax Credit calculated?

Once you determine which HTC credit you qualify for, you can estimate the actual credit amount. The IRS will only allow qualified rehabilitation expenses (QREs) to fall under the tax credit, those expenses that directly relate to the improvement of the building’s structural quality.

Expenses considered QRES are typically:

  • Floors
  • Ceilings
  • Plumbing & electrical wiring
  • Windows and doors

Expenses not considered QRES are typically:

  • Acquisition Costs
  • Demolition
  • Financing fees
  • Paving & landscaping

What type of development is needed to qualify for a HTC?

The government doesn’t hand out HTCs to every fixer upper building. In order to qualify for an HTC, your rehab project must meet the Secretary of the Interior’s standard of “substantial.” That means an investment equal to the the adjusted property basis, or $5,000–whichever is greater. View the Department of the Interior’s complete standards for rehabilitation here.

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Managing a historic rehabilitation project is a complex, time-consuming task. You shouldn’t go through it without an experienced team of consultants, attorneys and accountants making sure everything goes according to plan. Trust the Sunflower Development Group team to handle every aspect of your project from start to finish.

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