Federal 20 and 10 Percent Historic Tax Credits
How to Use HistoricTax Credits
To qualify for either the 20 percent or the 10 percent historic tax credit, the rehabilitation must be “substantial”. A substantial rehabilitation means that a taxpayer’s QREs during a 24-month or 60-month measuring period (for a phased project) must exceed the “adjusted basis” of the building or $5,000, whichever is greater. The adjusted basis is generally defined as the purchase price, minus the cost of the land, plus the value of any capital improvements made since the building acquisition, minus any depreciation already taken. Eligible properties must be income-producing to qualify for historic tax credits; therefore, owner-occupied residences are not eligible.
To qualify for the 20 percent credit, the rehabilitation must also be certified as conforming to the Secretary’s Standards for Historic Rehabilitation. This certification is achieved by completing a three-part application process which is reviewed first by the state historic preservation office (SHPO) and then by the National Park Service (NPS).
- Part 1 makes the case for National Register property listing or verifies that a property is a contributing structure in a National Register District;
- Part 2 summarizes the scope of the rehabilitation; and
- Part 3 documents that the work has been done as proposed in the approved Part 2.
Virtually all of the rules that
apply to the 20 percent historic credit apply to the 10 percent credit with a few notable exceptions. The 10 percent credit requires no design review at the state or federal level, but there is a “wall test” requiring that three of the original four exterior walls remain intact. If this property is located within a historic district, the Part 1 application must be filed and approved by the National Park Service to confirm its non-contributing status. To redeem the 10 percent credit, the developer simply needs to attach Form 3468 to his/her tax return.
The compliance and recapture period for the federal historic credits is five years from the date the property is placed in service. Twenty percent of the recapture risk burns off every year.
How Nonprofit Groups Can Use Tax Credits
Nonprofit organizations and public agencies do not pay federal or state income taxes and therefore have no tax liability against which to apply historic tax credits. Also, many for-profit entities are not in a tax position to make full use of the value of the credit. Fortunately, in these instances, it is still possible to tap into the value of the historic tax credit by transferring (or ‘syndicating’) the tax credit to a corporate investor, or in certain instances, individuals, who then use the tax credit to offset some of their own tax liability.