People are generally happy about saving our historic buildings, right? They have a charm and irreplaceable quality that even casual inhabitants notice…until you add a price tag. Unfortunately, preserving historic buildings is not always cheap. While the building being preserved of course already exists, renovating, restoring or rehabilitating it has to be done in a pre-existing context that isn’t always cost-effective. Many of the techniques for cutting costs used in new construction simply can’t apply to existing, and especially old existing, buildings. This reality, pitted against the fact that historic buildings nevertheless have some intrinsic value, is largely why tax incentives have sprung up at both national and local levels. They are a way of affirming both the cost and value of preserving the past.
What is a Tax Credit?
A tax credit is a monetary incentive that lowers the amount of tax owed on a permitted project. A $1 tax credit reduces the income tax owed by $1. A “20% tax credit” equates to 20% of the money spent on a certified rehabilitation project. The tax credit program offers incentives up to 20% at both the state and federal level. The State Historic Preservation Office (SHPO) reviews initial applications. The National Park Services (NPS) administers the requirements and reviews/approves applications. The IRS actually grants the tax credit. The credit covers A/E, surveying and legal fees, development fees, and construction costs. It does not cover furnishings, additions or new construction, or site improvements like parking and landscaping. Credits may be sold or taken incrementally, and can be recaptured if the owner owns the building for five years.
What is a Certified Historic Structure?
The way Tax Credits work is through a Certified Rehabilitation process. A Certified Historic Project is one that is listed individually on the National Register of Historic Places (NRHP), or is a contributory structure to a NRHP Historic District. A Certified Rehabilitation requires compliance with “The Secretary of the Interior’s Standards for Rehabilitation”, a document prepared by the National Park Service. Compliance must be approved by the SHPO and the NPS. While some alteration of a project may occur to improve efficiency, “the project must not damage, destroy, or cover materials or features, whether interior or exterior, that help define the building’s historic character.”
The IRS also has requirements for eligibility. The building must be depreciable (i.e. not a private residence), it must be substantial (more than $5,000), must be be in service the year the tax credit is taken, and must meet the Certified Rehabilitation status above.
What is the process for obtaining a Tax Credit?
Obtaining a tax credit requires obtaining Certified Historic Structure status. This is already the case if the building is on the NRHP list. Otherwise, an application process must be followed. The first step is an “Evaluation of Significance” approved by SHPO and the NPS. This can usually be achieved if the building is 50 years old, relatively intact architecturally, and historically or architecturally significant. It is highly advisable to receive approval before starting the rehabilitation work. The actual work proceeds under the standards set for in the “Secretary of the Interior’s Standards for Rehabilitation”. Upon completing the work, a final submission is made reporting and documenting what was done and approval is received. The tax credit is obtained via IRS Form 3468, submitted the tax year that the building was placed into service. If it is a phased project, the credit could be claimed at the time of “substantial completion”.
Want to know more?
CRSA has a dedicated Preservation Studio which has completed over 40 Historic Tax Credit projects, and many more projects involving the National Register of Historic Places. If we can help in any way, please contact our office.