What are Historic Tax Credits?

So, you want to lean about historic tax credits. Here, we’ll provide a basic introduction to both federal and state historic tax credits. Because Post Oak is based in Texas, this post will emphasize Texas historic tax credits. Many states have historic tax credit programs, but each one is unique. 

What is the purpose of historic tax credits?

Historic tax credits, state and federal, are intended to make old buildings economically viable. Historic tax credits are not about restoring historic buildings to their original use and appearance, though certain guidelines must be followed. Instead, tax credits encourage the preservation of original building materials, configurations, and appearance where possible while adapting the building for continued use in the modern world. The credits help offset the additional costs associated with the rehabilitation of historic buildings.

Historic tax credit projects create jobs and stimulate the economy. Because historic projects are more labor-intensive, they provide more jobs than comparable new construction projects. Rehabilitation preserves not only historic buildings, but also precious natural resources. By rehabilitating a building rather than demolishing and building new, historic projects preserve the embodied energy in the building and avoid sending waste to the landfill. Preservationists everywhere know that the greenest building is the one already built.

What guidelines govern historic tax credits?

Both state and federal historic tax credits rely on the Secretary of the Interior’s Standards for Rehabilitation. These guidelines are used by reviewers to determine whether proposed work is appropriate for a historically significant building. The standards are purposely open ended, such that reviewers can consider each project’s merits individually.

Projects are reviewed according the the Standards and proposed work is considered for its cumulative effect on historic resources. Though the Standards seem open-ended, fortunately, the National Park Service (NPS) provides technical briefs for guidance on a wide range of work including masonry restoration, making historic buildings ADA compliant, energy efficiency in old buildings, new construction,  and much more.

What are Federal Historic Preservation Tax Incentives?

The federal historic preservation tax incentive program is often called “Rehabilitation Tax Credits” or “Historic Tax Credits”. Since its inception in 1976, the federal historic tax credit program has leveraged over $162 billion in private investment and preserved over 40,000 buildings. In fy2018 alone, the Federal historic tax credit program created $7.7 billion in rehabilitation work certified and 129,000 jobs, in addition to adding moderate and low-income housing to communities in need.

The National Park Service (NPS) within the Department of the Interior (DOI) oversees the Federal historic tax credit program. The federal tax credit is applied to your federal income tax for the year in which the project is completed. If needed, the federal credit can be monetized through a tax credit investor.

Who is eligible for Federal historic tax credits?

In order to qualify for the federal credit, the rehabilitation project must meet the investment threshold, which is quite high. In order to qualify, the project must be “substantial” meaning that the Qualified Rehabilitation Expenditures (QREs) for the project must equal 100% of the adjusted basis of the property.

For example, if the value of a parcel is $1 million and the value of the building is $500,000, the project would need to require at least $500,000 of work to qualify for the federal tax credit. Only buildings are eligible to receive historic tax credits. Landscapes, bridges, and other structures are not eligible. Projects must be income-producing. Private residences and non-profits are not eligible for the federal credit.

This credit can offset 20% of Qualified Rehabilitation Expenses. To qualify for federal historic tax credits, the building must be historically significant, meaning that the building(s) must be listed individually in the National Register of Historic Places or a contributing resource to a National Register of Historic Places Historic District. If a building is not presently listed on the National Register, a nomination may be submitted simultaneously with the tax credit applications. Check on the National Register website, the website of the local State Historic Preservation Office, and/or with the city to determine if a property is already listed on the National Register.

Projects must be income-producing, such as retail, offices, or rental housing. Private residences and non-profits are not eligible for the Federal credit.

Process

The Federal credit has a 3-part application process (1,2,3):

1. Certification that the building is historic (either listed on the National Register, contributing to a National Register Historic District, or determined to be eligible for listing on the National Register)

2. Scope of Work. The Part 2 application includes detailed information, photographs, and drawings pertaining to the entire project.

3. Certification of Completed work. The Part 3 application includes photos of the completed project along with a cost certification analysis.

The State Historic Preservation Office (SHPO) reviews each part of the application. The SHPO has 30 days to complete their review before sending the application onto the National Park Service (NPS) for another 30 day review period. Final approval comes from NPS.

What are Texas Historic Preservation Tax Incentives?

The Texas historic tax credit became available in January 2015 and is worth 25% of Qualified Rehabilitation Expenses (QREs). The credit is applied to the franchise tax burden. If the ownership entity does not owe a franchise tax, the credit may be sold to an investor. Projects that utilize the Texas credit may also utilize the Federal credit, accounting for tax credits equivalent to 45% of your QREs.

Who is eligible for Texas Historic Tax Credits?

To qualify for the Texas tax credit program, the building must be historically significant. This includes listing on the National Register of Historic Places and/or as a Recorded Texas Landmark. Unlike the Federal credit, the new use of a Texas tax credit project may be nonprofit (church, museum, etc.) or for profit (commercial, office, rental housing, etc.). Also unlike the federal credit, the minimum investment requirement for the Texas credit is just $5000 regardless of the value, size, or  condition of the building. The low investment threshold for the Texas credit means that buildings can rehabbed in a piecemeal fashion, working bits at a time as the cashflow allows, and applying for the Texas credit each time. The low threshold also makes smaller projects that would otherwise not qualify for the Federal credit, such as small-scale Main Street type buildings, more accessible.

Process

The Texas tax credit application process has three parts (A,B,C). These applications mirror the Federal applications and should be submitted concurrently with Federal applications if the project uses both. Each of these applications is submitted to the Texas Historical Commission (THC), also known as the State Historic Preservation Office (SHPO). The THC takes about 30 days to review each application.

What does a historic preservation consultant, like Post Oak, do for tax credit projects?

A historic preservation consultant’s job is to guide their clients through the tax credit application process to ensure that they secure the valuable credits. Consultants should have a good understanding of what the reviewers are looking for and can get a project approved. Consultants will guide their client and the design team through the design process, ensuring that the proposed work will meet the Secretary of the Interior’s Standards for Rehabilitation. Consultants complete all photography, research, and applications for the tax credit programs as well as serve as the contact person for the reviewers at SHPO and NPS. A good consultant will be the project’s biggest advocate.

Ready to get started on your historic tax credit project? Contact us today!