Historic Rehabilitation Tax Credit
What Owners and Developers of Historic Buildings Need to Know
By: Ron Wainwright, David McCallum and Anne Yancey
The Historic Rehabilitation Tax Credit (“HTC”) is a federal incentive to renovate, restore, and revive historic buildings. The HTC essentially serves as an indirect federal subsidy to finance the rehabilitation of certified historic structures (buildings listed on the National Register of Historic Places or listed as contributing to National Register or state or local certified historic district) with a 20% tax credit claimed ratably over five years for qualified rehabilitation expenses (“QREs”). Prior to the enactment of the Tax Cuts and Jobs Act (“TCJA”) in December 2017, a 10% HTC was available for non-historic pre-1936 buildings. The HTC program is jointly administered by the Department of the Interior and the Department of Treasury (via the IRS).
While IRS Tax Reform Tip 2019-64 covers the essentials of the HTC, the IRS’s website contains further helpful links, including FAQs on the Tax Aspects of the HTC and Real Estate Tax Tips concerning the HTC.
Tax Reform Impact
Key amendments to the HTC via the TCJA went into effect on January 1, 2018; however, some transition rules were put into place. First, the 20% HTC was modified and now must be claimed ratably over five years starting with the tax year in which the building was placed in service. Previously, the 20% HTC was claimed in full in the tax year the building was placed in service to the extent it could be utilized the by the taxpayer. Second, the TCJA eliminated the 10% HTC for non-historic pre-1936 buildings where the QREs were incurred after December 31, 2017. Lastly, the TCJA provided for a transition rule that will allow 10% and 20% HTCs to be claimed if two criteria are met:
- The taxpayer owned or leased the building on January 1, 2018, and the taxpayer continues to own or lease the building after that date; and
- The 24- or 60-month period selected by the taxpayer for the substantial rehabilitation test began by June 20, 2018.
Accomplishments and Successes of the HTC Program
As detailed in the National Park Service’s Annual Report for Fiscal Year 2018, the HTC is the largest and most significant federal program that supports historic preservation. The HTC program creates jobs, spurs economic activity, increases property values in older communities, creates affordable housing, and increases revenue for federal, state, and local governments, while providing a nice tax benefit for investors.
Since its inception in 1976, over 44,000 certified HTC projects have been completed using almost $97 billion of rehabilitation investments. In fiscal year 2018 alone, over $6.9 billion in rehabilitation investments funded over 1,000 completed certified projects, both large and small. These HTC program projects and investments were instrumental in preserving historical buildings and places that add character, uniqueness, and distinctive aspects to cities, towns, and even rural areas.
State HTC Opportunities
In addition to the federal HTC program, 35 states have some form of historic rehabilitation tax credit that may be used in tandem with the federal HTC. Many of the state programs mirror the federal HTC program, but change the percentage amount of the credit at the state level. Anne Yancey, Director of State Credits & Incentives, adds that state historic credits are often overlooked or not pursued; however, companies should consider any potential additional benefits. Cherry Bekaert can assist your businesses in qualifying properties for the state programs.
Interested? Questions? Reach Out.
Want to know more? Interested in rehabilitating a building, improving a community, and receiving a tax benefit? Cherry Bekaert’s Credits and Accounting Methods Team and Real Estate & Construction Industry Group are here to answer your HTC questions and provide a host of consulting and compliance services.