Some Thoughts on Rehabilitation Tax Credits

Since 1977, federal tax credits for the rehabilitation of historic buildings have facilitated over 34,000 projects, leveraging over $50 billion in private investment.[1] [2] These projects have helped to return vacant and underutilized properties to productive use, enhanced local tax rolls, and created jobs.  A recently enacted New York State credit program matches the federal incentive for certain income-producing buildings and adds a credit for rehabilitation of owner-occupied residences in economically challenged neighborhoods.

The 20% Federal Tax Credit for Income-Producing Buildings

The federal tax credit is available only to income-producing buildings (such as rental apartments, hotels, offices, and retail buildings).  The building must be:

a)      Individually listed in the National Register of Historic Places; or

b)      A contributing building in a district listed in the National Register; or

c)      A contributing building in a local historic district that has been certified as substantially meeting National Register criteria.

The credit is available only for substantial rehabilitations: the project cost must equal or exceed $5,000 or the adjusted basis (a calculation of the value of the building), whichever is greater.  The credit value is 20% of qualified rehabilitation expenses, and is a dollar-for-dollar reduction of income tax liability (not a deduction). Qualified rehabilitation expenses (QREs) are costs associated with rehabilitating the historic building, including construction costs and fees.  Costs related to acquisition, construction of an addition, furniture, or landscaping are examples of expenditures that do not count as QREs.

To qualify for the credit, the project must comply with the Secretary of the Interior’s Standards for Rehabilitation.  These standards are designed to protect the building’s important features while allowing sensitive conversion to a new use.  The State Historic Preservation Office (SHPO) is responsible for reviewing projects for compliance with the standards.

The State Commercial Credit

New York State now offers a tax credit for the rehabilitation of certain historic commercial properties eligible for the federal credit.  Like the federal credit, the state credit amount is 20% of qualified rehabilitation costs.  Unlike the federal credit, the state program caps credit value at $5,000,000 and is only available to projects in specific, economically distressed areas.

The 10% Federal Tax Credit for Non-Historic Rehabilitations

A 10% credit is available for the rehabilitation of buildings constructed before 1936 that are not listed in or eligible for the National Register.  The rehabilitation must cost at least $5,000 or the adjusted basis of the property, whichever is greater, and the building must be used for a non-residential income-producing use, such as office or hotel, but not apartments.  The rehabilitation must retain at least 75% of the external walls and internal structural framework.[3]

NYS Residential Credit

A new state tax credit enables owner-occupants of buildings individually designated in the National Register, or which contribute to a National Register-listed district, to take a credit of 20% of the cost of rehabilitation, up to a $50,000 credit.  The property must be located in an economically distressed census tract.  The project must cost at least $5,000, at least 5% of which must be spent on the exterior of the building, and the work must be reviewed by SHPO for compliance with the Secretary’s Standards.

Tips for Using the Credits

  • Contact SHPO as early in the process as possible, before starting work, and wait for official SHPO and National Park Service (NPS) approval before beginning.  SHPO staff take their role in protecting taxpayer interests seriously and must uphold National Park Service and Internal Revenue Service regulations.  Too often, owners expect to apply for the credits when the project is complete.  It is highly unlikely that SHPO and the NPS will certify the credits under these conditions; we never recommend taking this risk.
  • Assemble a qualified team of experts.  These will include a tax professional to ensure compliance with IRS regulations and a preservation architect to interpret and implement NPS standards and guidelines.  Large and complex projects may involve many more players to ensure a smooth process.  Bero Architecture has assisted many clients with tax credit projects, providing design services and completing the necessary paperwork to document compliance.
  • Take a comprehensive set of photos before starting the project.  (This typically falls within the preservation architect’s scope of work.)  This documents the pre-rehabilitation condition and is needed to demonstrate appropriateness of the proposed and completed work.

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[1] While Bero Architecture PLLC can provide guidance as to the architectural and preservation aspects of the tax credit, decision-making power rests with the state and federal agencies referenced (SHPO, IRS, and NPS).  Bero Architecture does not have expertise in legal or accounting matters, and nothing in this publication substitutes for the advice of an attorney or accountant.

[2] The National Trust for Historic Preservation.  See also The Historic Tax Credit Coalition, First Annual Report on the Economic Impact of the Federal Historic Tax Credit. March 2010, http://www.nps.gov/tps/tax-incentives/taxdocs/economic-impact-2010.pdf  (Accessed 4/20/2010).

[3] Note that if the building is eligible for the 20% Federal tax credit it is not eligible for this 10% credit.