Historic Rehabilitation Tax Credit

Historic Rehabilitation Tax Credit

Criteria

The NPS defines the criteria as:

• Age and Integrity. Is the property old enough to be considered historic (generally at least 50 years old), and does it still look much the way it did in the past?
• Significance. Is the property associated with events, activities or developments that were important in the past? With the lives of people who were important in the past? With significant architectural history, landscape history or engineering achievements? Does it have the potential to yield information through archeological investigation about our past?

Any rehabilitation or renovation done to the property may qualify for significant tax incentives from both the federal government and the state in which the property is located.

This article outlines the rules and regulations surrounding the federal credit. In many cases individual states have separate programs that are the same or similar to the federal program.

The federal government provides a credit of 20% on certain rehabilitation projects done to the building. The State of Maine, for example, allows a 25% credit on the same rehabilitation expenditures. Therefore, if you have a qualifying property located in Maine you will receive credits totaling 45% of your expenditures. Once these credits are established they may be subject to certain limitations; however, any credits not used can be carried forward to future years or carried back.

It is important to note that not all of the construction done to the building will qualify for these credits. These rules will be explained later in the article.

Application Process

The federal program is administered by the National Park Service (NPS), US Department of the Interior. There is a three-part application process involved in order to have your building certified. The NPS’s outline of the application process is listed below.

To qualify for the credit the property must be substantially rehabilitated. You will be required to choose a 24-month period and during that period the rehabilitation expenditures must exceed the greater of the adjusted basis of the building and its structural components (prior to undertaking the rehabilitation) or $5,000 (land is not included).

If your project requires you to complete the renovation in phases then you may use a 60-month period instead of the 24-month period noted above. Using the 60-month period requires more documentation on the phases including more detailed architectural plans for each phase of the project.

Property qualifying for the credit is generally 27.5 and 39 year property that is depreciated on the straight line basis. Some examples of property not qualifying for the credit include:

• Costs of acquiring the building
• Costs of enlarging the building
• Costs of separate structures on the property that are not certified historic structures
• Costs associated with parking lots, sidewalks and landscaping
• Storm and sewer construction
• Carpeting (only if tacked in place as opposed to glued)

Some examples of property that qualifies for the credit include:

• Interior and exterior structural components
• Painting
• Walls and partitions
• Bathroom remodels
• HVAC systems
• Plumbing and electrical
• Interest on construction loans incurred during the construction period
• Architectural fees and reasonable development/manager fees

When placing the property in service and claiming the credit you will need to reduce the basis of the building by the amount of the credit generated. The remaining basis is required to be depreciated on the straight line basis over the useful life of 27.5 or 39 years, depending on the use of the property.

As with most tax credits and incentives they come with some limitations. The rehabilitation tax credit can be limited due to the passive activity rules, alternative minimum tax (AMT) and the tentative minimum tax. Taxpayers that materially participate in the activity, as well as taxpayers that are considered to be real estate professionals, will not be subject to the AMT limitations.

These credits are first claimed on Form 3468, Investment Credit, and then on Form 3800, General Business Credit, where the limitations are applied, if applicable.

If you are in the process of rehabilitating a qualified building or examining the future benefits of a potential project it is important to follow the steps for approval with the National Park Service and that you understand the costs that qualify for the credit and the potential limitations that may apply.

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