Partners (Summer 1999)
Partners (Summer 1999)
This discussion of the Federal Historic Preservation Tax Incentives Program is limited to a broad overview. For more detailed information, copies of application forms, regulations, and other program information, contact one of the offices listed at the end of this article. In addition, because of the complexity of the Tax Reform Act of 1986, readers are advised to consult an accountant, tax attorney, or the Internal Revenue Service for assistance in determining specific tax and other financial implications.
Historic buildings represent our link to the past, providing a sense of identity, character, and stability to our communities. Recognizing their value in revitalizing cities, towns, and rural areas, the federal government encourages their preservation in several ways. One of the ways is through grants for planning and preservation from the Historic Preservation Fund. Another way, which we will discuss here, is through the Federal Historic Preservation Tax Incentive program.
Federal Tax Credits
Federal Historic Preservation Tax Incentives are available for buildings listed in the National Register, and certain historic districts that undergo substantial rehabilitation for income-producing purposes. These renovations must be in compliance with standards set by the Secretary of the Interior. The program is jointly managed by the National Parks Service (NPS) and the Internal Revenue Service (IRS) in partnership with State Historic Preservation Offices. Currently, the incentives include a 20 percent tax credit for the rehabilitation of certified historic structures and a 10 percent tax credit for the rehabilitation of non-historic, non-residential buildings built before 1936. In both instances, the rehabilitation must be substantial and must involve a depreciable building. That is, the building must be used in trade or business or held for the production of income.
What is a Tax Credit?
Unlike an income tax deduction, which lowers the amount of income subject to taxation, a tax credit lowers the amount of tax owed generally resulting in a dollar-for-dollar reduction in federal income taxes. In other words, every dollar in tax credit reduces the amount of income tax owed by a dollar.
Summary of the Rehabilitation Tax Credits
The 20 percent rehabilitation tax credit is equal to 20 percent of the amount spent in a certified rehabilitation of a certified historic structure. The 10 percent investment tax credit is available for renovating non-historic buildings constructed before 1936. In both instances, the tax credit percentage is based on the rehabilitation costs, and does not include the purchase price. So, for example, a qualifying rehabilitation that costs $50,000 on a building that was purchased for $100,000 will be awarded a $10,000 tax credit. (20 percent times $50,000 rehabilitation costs.) The tax credit applies to the building owner's federal income tax for the year in which the project is completed and approved. If it is not all needed in that year, the credit may be carried back for three years, or forward for 15 years.
Buildings that Qualify
The 20 percent historic rehabilitation tax credit is available for buildings listed in the National Register of Historic Places which, after rehabilitation, are used for commercial or residential rental use. The building may also qualify if it is located in a registered historic district - a district listed in the National Register of Historic Places - and certified by the National Park Service as contributing to the historic significance of that district. A state or local historic district may also qualify as a registered historic district if the district and the enabling statute are certified by the Secretary of the Interior.
Work on the interior or exterior of the building qualifies for the tax credit; however, landscaping and new additions do not qualify. The National Park Service must certify the work on a historic building. This is done by completing an application and submitting it to the NPS along with "before" and "after" photos showing all work areas.
The 10 percent non-historic tax credit is available for buildings constructed prior to 1936 that are used for commercial, but not residential rental purposes. The work does not have to be reviewed for the 10 percent credit. Neither investment tax credit is available for the rehabilitation of a private, owner-occupied residence.
In order to qualify, the rehabilitation expenditures must exceed the greater of the adjusted basis of the building or $5,000. The adjusted basis is the purchase price, less the value of the land and any depreciation already taken by the current owner, plus any capital improvements. For example, on a recently purchased property:
Purchase Price $ 100,000 - Land value 20,000 Adjusted Basis $ 80,000
Rehabilitation expenses must exceed $80,000.
In another example in which the property has been owned for a while:
Purchase Price $ 75,000 - Land value 20,000 - Depreciation 40,000 + Capital Improvements 25,000 Adjusted Basis $ 40,000
Rehabilitation expenses must exceed $40,000.
Rehabilitated property is depreciated using the straight-line method over 27.5 years for residential property and over 39 years for non-residential property. The depreciable basis of the rehabilitated building must be reduced by the full amount of the tax credit claimed.
Sale of a Rehabilitated Building
In order to avoid any recapture of the tax credit by the federal government, a building must be held for a minimum of five years. If the owner disposes of the building within a year after it is placed in service, 100 percent of the credit is recaptured. For properties held between one and five years, the tax credit recapture amount is reduced by 20 percent per year.
For a copy of the Department of the Interior regulations governing the procedures for obtaining historic preservation certifications, please refer to Title 36 of the Code of Federal Regulations, Part 67. The Internal Revenue Service regulations governing tax credits for rehabilitation can be found in Treasury Regulation Section 1.48-1.
Contacting Your State Historic Preservation Office or the National Park Service
To learn more about the Federal Historic Preservation Tax Incentives, contact:
Federal Historic Preservation Tax Incentives
Heritage Preservation Services
National Park Service
1849 C Street NW
Washington, DC 20240
Phone: Michael Auer (202) 343-9594
Contact your State Historic Preservation Office. Sixth District contacts are:
Mr. Lonice Barrett, Commissioner
Department of Natural Resources
500 The Healy Building
57 Forsyth Street, NW
Atlanta, Georgia 30303
Phone: (404) 656-2840
Mr. George W. Percy, Director
Division of Historical Resources
R.A. Gray Building
500 S. Bronough Street
Tallahassee, Florida 32399
Phone: (850) 488-1480
Mr. Elbert Hilliard, Director
State of Mississippi Department of Archives and History
P.O. Box 571
Jackson, Mississippi 39205
Phone: (601) 359-6850
State Historic Preservation Officer
468 South Perry Street
Montgomery, Alabama 36130
Phone: (334) 242-3184
Mrs. Gerri J. Hobdy
Office of Cultural Development
P.O. Box 44247
Baton Rouge, Louisiana 70804
Phone: (504) 342-8200
Mr. Milton H. Hamilton, Jr.
Commissioner, Department of Environment and Conservation and State Historic Preservation Officer
2941 Lebanon Road
Nashville, Tennessee 37243
Phone: (615) 532-0105
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