Commonly known as the “historic tax credit,” the Federal Historic Preservation Tax Incentives Program provides a 20% credit for historic buildings to cover qualified rehabilitation expenses (QREs) including most construction and design costs, and certain holding costs such as insurance and property taxes.
In order to qualify for the tax credit, these four criteria must be met:
1. The structure must be listed in the National Register of Historic Places, or be certified as contributing to the significance of a “registered historic district.”
To determine whether a building qualifies, contact your local historic district commission, municipal planning office, or State Historic Preservation Office. Even if the property is located in a National Register district or a certified state or local district, it still must be certified by the National Park Service (NPS) as a structure that retains historic integrity and contributes to the historic character of the district. Note that not all buildings in a district necessarily contribute in this way. When NPS designates historic districts, they usually associate them with a particular “period of significance,” such as “mid-1800s to 1935.” In that example, a building erected in 1950 would not contribute, and therefore would not be eligible for the 20% credit.
If you find that your building is not listed as a certified historic structure, you can still ask the National Park Service to determine that it is eligible for National Register listing by completing and submitting Part 1 of the Historic Preservation Certification Application.
In general, buildings and districts are eligible for listing in the National Register for any of four reasons:
Association with broad patterns of historic development: They are associated with events that have made a significant contribution to the broad patterns of our history. Many buildings and historic districts fall under this category, and historic downtowns and neighborhoods are the most obvious examples. Less obvious are buildings tied to the development of a particular industry, building types such as apartment buildings from a certain era, or buildings associated with particular inventions, artistic accomplishments or cultural innovations.
Association with significant persons: They are associated with the lives of significant persons in our past. The obvious buildings in this category are those associated with famous persons. Less obvious are buildings that are connected to persons who were significant to the history of a local community. Examples of this category could include the house of a town’s first mayor, the laboratory where an inventor of a now-common item worked, or the residence of a leader who left a lasting impression on the community.
Quality of architectural design: They embody the distinctive characteristics of a type, period, or method of construction, represent the work of a master, possess high artistic values, or represent a significant and distinguishable entity whose components may lack individual distinction. Top-of-mind buildings in this category include the masterpieces designed by celebrated architects. Less obvious are beautiful buildings constructed by master builders. Even less obvious are those buildings that are rare because they show us how our ancestors built, such as log cabins, settlers’ houses and early meeting houses. This category also includes local anomalies, such as the Earl Young-designed “mushroom” houses in Charlevoix, Michigan.
Archaeological resources: They have yielded, or may be likely to yield, information important in history or prehistory. This category is probably less significant for the purposes of historic tax credits, but is intended to recognize that historic places may have buried or otherwise hidden resources that should be recognized through listing in the National Register of Historic Places.
A key point to realize is that many aging buildings are eligible for this program—but this fact is not always obvious based on a building’s appearance to a casual observer. For example, 71 Garfield in Detroit was a tired, vacant apartment building that had suffered a major fire and was almost beyond saving. But through the strategic use of historic tax credits, Quinn Evans helped its owner turn it into a green office and residential space with an almost net-zero-energy profile.
2. The project must meet the “substantial rehabilitation test.”
The cost of rehabilitation must exceed the pre-rehabilitation cost of the building. Generally, this test must be met within two years or within five years for a project completed in multiple phases.
The cost of a project must exceed the greater of $5,000 or the building’s adjusted basis. The following formula will help you determine if your project will meet the substantial rehabilitation test:
Some expenses associated with a project may not qualify for the tax credit, such as a new addition, new kitchen appliances, or landscaping. To learn more, refer to NPS’ list of qualified expenses.
3. The work must comply with the Secretary of the Interior’s Standards for Rehabilitation.
These are 10 principles that, when followed, ensure the historic character of the building has been preserved in the rehabilitation. The Standards for Rehabilitation, which are reprinted on page 9–10 of this document, also take into consideration economic and technical feasibility.
4. After rehabilitation, the historic building must be used for an income-producing purpose for at least five years.
The 20% tax credit is available only to properties rehabiliitated for income-producing purposes. These include commercial, industrial, agricultural, rental residential or apartment use. The credit cannot be used to rehabilitate a non-income producing property, such as a private residence.
However, if a portion of a personal residence is used for business, such as an office or a rental apartment, in some instances the amount of rehabilitation costs spent on that portion of the residence may be eligible for the credit.
You should be aware that there are additional factors that determine if a property is eligible for this program. To qualify under the pre-tax reform provisions, several conditions must be met. First, the building must have been owned by the entity that will benefit from the tax credits as of December 31, 2017. Second, any qualified expenditures must begin by June 20, 2018. Third, work must be completed within 24 months of that date for a non- phased project and within 60 months for a phased project. These requirements also apply to the 10% credit for non-historic buildings built before 1936, which has otherwise been eliminated.
Another important consideration is that the substantial rehabilitation test (a 24-month measuring period, or 60-month period for phased projects) must begin no later than 180 days from the enactment of the tax bill, i.e., approximately July 1, 2018. The purpose of this test is to make certain that credits go to projects characterized by significant property investments and rehabilitation costs that exceed the building’s pre-rehabilitation cost. The taxpayer generally selects the beginning and end dates for their project’s measuring period. Under the transition rule, however, the measuring period’s starting date is predetermined. In order for projects that use the 24-month measuring period (the more common approach) to be eligible for tax credits under the old code, the building must be placed into service, and qualified rehabilitation expenditures must be incurred, prior to December 31, 2020.
In the next post, I’ll explain how to apply for the program and what standards you will need to meet.
For recommendations on how to determine whether your building is eligible for the program, how to apply, and how to ensure you receive the credits, check out the guide below.