*This document was written by the National Park Service
This document describes the preservation tax incentives program in outline
form only. For more detailed information, contact one of the NPS offices
listed below or your State Historic Preservation Office. The Tax Reform
Act of 1986, moreover, is extremely complex. Readers should consult a professional
tax advisor, legal counsel, or the Internal Revenue Service for help in
determining the tax and other financial implications of any matters discussed
here.
A community's historic buildings are the tangible links with its past. The Federal government encourages the preservation of historic buildings through various means. One of these is the program of tax incentives for the rehabilitation of historic and other old buildings. These incentives encourage investment in historic buildings and the revitalization of historic districts.
The Tax Reform Act of 1986 (PL 99-514) established tax incentives for rehabilitation:
The Federal historic preservation tax incentives program is jointly administered by the Department of the Interior and the Department of the Treasury. The National Park Service (NPS) acts on behalf of the Secretary of the Interior. The Internal Revenue Service (IRS) acts on behalf of the Secretary of the Treasury. Certification requests for historic buildings are made to the National Park Service through the appropriate State Historic Preservation Officer (SHPO). Approval of projects undertaken for the 20% tax credit, however, is conveyed only in writing by duly authorized officials of the National Park Service.
A tax credit lowers the tax owed. A tax credit differs from an income tax deduction. An income tax deduction lowers the amount of income subject to taxation. A dollar of tax credit reduces the income tax owed by one dollar, regardless of the income level of the recipient. (Note: other provisions of the 1986 Tax Reform Act affect real estate investments in general. See "Claiming the Tax Credit" and other sections below.)
The 20% rehabilitation investment tax credit equals 20% of the amount spent in a certified rehabilitation of a certified historic structure.
The 10% rehabilitation investment tax credit equals 10% of the amount spent to rehabilitate a non-historic building built before 1936.
Rehabilitation Investment Tax
Credit
Ongoing eligibility. Provides a 20% federal tax credit for qualified
rehabilitation of qualified income-producing historic buildings. The credit
can apply to access improvements within the historic building and to new
construction, such as added ramps if they are clearly for access purposes.
For information contact: Curtis Johnson, Vermont Division for Historic
Preservation, 135 State Street. Drawer 33, Montpelier, VT. 05633-1201,
telephone: (802) 828-3047.
20% Investment Tax Credit
The 20% rehabilitation investment tax credit applies to any project that the Secretary of the Interior designates a certified rehabilitation of a certified historic structure.
--OR--
Owners of buildings within historic districts must complete Part 1 of the Historic Preservation Certification Application-- Evaluation of Significance. The owner submits this application to the SHPO. The SHPO reviews the application, and forwards it to the National Park Service (NPS). The NPS then determines whether the building contributes to the historic district. If so, the building is a "certified historic structure." The NPS bases its decision on the Secretary of the Interior's "Standards for Evaluating Significance within Registered Historic Districts." These Standards are printed elsewhere in this document.
Buildings individually listed in the National Register of Historic Places are already certified historic structures. Owners of these buildings need not complete the Part 1 application.
Property owners unsure if their building is in the National Register or if it is located in a registered historic district should contact their SHPO. Each SHPO has complete records of buildings and districts listed in the National Register of Historic Places, as well as state and local historic districts that may also qualify as "registered historic districts." The SHPO can also assist anyone wishing to list a building or district in the National Register.
Owners of buildings that are not yet listed in the National Register of Historic Places or located in districts that are not yet registered historic districts may use the Historic Preservation Certification Application, Part 1, to request a preliminary determination of significance from the National Park Service. Such a determination allows the owner to proceed with the rehabilitation project while the process of nominating a building or a district continues. Preliminary determinations, however, are not binding and become final only when the building or the historic district is listed in the National Register.
A certified rehabilitation is a rehabilitation of a certified historic structure that is consistent with the historic character of the property and, where applicable, the district in which it is located.
Owners seeking certification of rehabilitation work must complete Part 2 of the Historic Preservation Certification Application-- Description of Rehabilitation. (Lessees may also apply if their lease is 27.5 years for residential property or 31.5 years for nonresidential property.) The owner submits the application to the SHPO. The SHPO reviews the application and forwards it to the NPS.
The NPS reviews the rehabilitation project for conformance with the "Secretary of the Interior's Standards for Rehabilitation." These Standards are printed elsewhere in this document.
After the rehabilitation is completed, the owner submits Part 3 of the Historic Preservation Certification Application--Request for Certification of Completed Work, to the SHPO. The SHPO forwards the application to the NPS, which evaluates the completed work against the work as described in the Part 2-- Description of Rehabilitation. Only completed projects found to meet the Standards for Rehabilitation are designated "certified rehabilitations" for purposes of the 20% investment tax credit. Owners may submit Part 2 and Part 3 together, if they apply after the work is completed. However, the NPS strongly encourages applicants to apply before they begin work.
The NPS charges a fee for reviewing applications, except for rehabilitations under $20,000. The fee for review of proposed or ongoing work is $250. This fee for preliminary review is deducted from the final fee (if a review of proposed or ongoing work has been made prior to submission of the Request for Certification of Completed Work). Fees for review of completed rehabilitations appear below. In general, each rehabilitation of a structure is considered a separate project when computing the amount of the fee.
Fee Size of Rehabilitation
$500 $20,000 to $99,999
$800 $100,000 to $499,999
$1,500 $500,000 to $999,999
$2,500 $1,000,000 or more
To be eligible for the 20% tax credit for rehabilitation, a project must also meet the following basic tax requirements of the Internal Revenue Code:
Over 25,000 projects have been approved for the historic preservation tax credit. Observing the following points will make approval of your project more likely:
The tax credit must be claimed (on IRS form 3468) for the tax year in which the rehabilitated building is placed back in service. For phased projects, the tax credit may be claimed before completion of the entire project on the basis of "qualified progress expenditures" if construction is planned for two or more years.
The IRS requires that the final NPS certification of completed work be filed with the tax return claiming the tax credit. If final certification has not yet been received when the taxpayer files the tax return claiming the credit, a copy of the first page of the Historic Preservation Certification Application--Part 2, should be filed with the tax return. The copy of the application filed should show evidence that it has been received by either the SHPO or the NPS (date-stamped receipt or other notice is sufficient). In such cases, the taxpayer has up to 30 months after the date of the tax return claiming the tax credit to submit final certification of the rehabilitation to the IRS.
The owner must hold the building for five years after the rehabilitation. If the owner sells the building within the five- year period, 20% of the credit is recaptured for each year remaining.
The NPS may inspect a rehabilitated property at any time during the 5-year period. It may revoke certification if work was not done as described in the Historic Preservation Certification Application, or if unapproved alterations were made.
Rehabilitated property is depreciated using the straight-line method over 27.5 years for residential property and over 31.5 years for nonresidential property. The depreciable basis of the rehabilitated building must be reduced by the full amount of the tax credit claimed. Alternatively, rehabilitated property may be depreciated using the 40-year straight-line method (also with a full adjustment to basis by the amount of the credit). The difference between depreciation deductions using the 40-year straight-line and the 27.5 or 31.5-year straight-line methods is treated as an item of tax preference under the Tax Reform Act of 1986.
The 10% investment tax credit is available for the rehabilitation of non-historic buildings built before 1936.
As with the 20% investment tax credit, the 10% credit applies only to buildings--not to ships, bridges or other structures. The rehabilitation must be a substantial rehabilitation, exceeding either $5,000 or the adjusted basis of the property, whichever is greater. And the property must be income- producing.
Unlike the 20% tax credit, however, the 10% credit does not apply to buildings rehabilitated for any residential uses, whether for rental residences or the owner's personal residence.
Furthermore, projects undertaken for the 10% credit must meet a test governing the retention of external walls and internal structural framework:
The 10% investment tax credit applies only to non-historic buildings built before 1936. The 20% investment tax credit applies only to certified historic structures. The two credits are exclusive. Only one applies to a given project. Which credit applies depends on the building--not on the owner's preference.
Owners of buildings listed on the National Register of Historic Places may not take the 10% credit. Owners of buildings located in registered historic districts may claim the 10% credit only if they file Part 1 of the Historic Preservation Certification Application with the National Park Service and receive a determination that the building does not contribute to the district.
Section 6 of the Tax Treatment Extension Act of 1980 (IRC Section 170) established income and estate tax deductions for charitable contributions of partial interests in historic property (i.e., principally easements). The Tax Reform Act of 1986 retains these provisions. Generally, the IRS considers that a donation of a qualified real property interest to preserve a historically important land area or a certified historic structure meets the test of a charitable contribution for conservation purposes. For purposes of the charitable contribution provisions only, a certified historic structure need not be depreciable to qualify, may be a structure other than a building and may also be a portion of a building such as a facade, if that is all that remains, and may include the land area on which it is located.
The IRS definition of historically important land areas includes:
A number of States offer tax incentives for the rehabilitation of historic buildings. Check with the SHPO in your State. Requirements for State incentives may differ from those outlined here.
The Tax Reform Act of 1986 (IRC Section 42) also established a tax credit for acquisition, construction, or rehabilitation of low income housing. The credit is 9% per year for 10 years for each unit acquired, constructed, or rehabilitated without other federal subsidies and 4% for 10 years for units involving federal subsidies or tax-exempt bonds. Units must meet tests for cost per unit and number of units occupied by individuals with incomes below area median income. The law sets a 15-year compliance period.
Disabled Access Tax Credit
On-going eligibility. Allows eligible small businesses a federal tax
credit of 50% of eligible access expenditures that exceed $250 but do not
exceed $10,250. Contact the Internal Revenue Service.
Internal Revenue Service Tax
Deduction to remove Architectural and Transportation Barriers to People
with Disabilities and Elderly Individuals
Ongoing Eligibility. Allows a maximum federal tax deduction of $15,000
for expenditures that improve accessibility for a facility owned by the
taxpayer for use in his or her business. Contact the Internal Revenue Service.
Local tax assessment districts
and tax increment financing policies
State legislation enables local municipalities to adopt local taxes
to finance infrastructure improvements. Although few communities have adopted
tax assessment districts (TAD's) or tax increment financing plans (TIF's),
they are potential tools for supporting community re-investment.
The following Standards govern whether buildings within a historic district contribute to the significance of the district. Owners of buildings that meet these Standards may apply for the 20% investment tax credit.
The Secretary of the Interior's Standards for Rehabilitation
Rehabilitation projects must meet the following Standards to qualify as "certified rehabilitations" eligible for the 20% investment tax credit. The Standards are applied to projects in a reasonable manner, taking into consideration economic and technical feasibility.
The Standards apply to historic buildings of all materials, types, and sizes. They apply to both the exterior and the interior of historic buildings. The Standards also encompass related landscape features and the building's site and environment as well as attached, adjacent or related new construction.
The Tax Reform Act of 1986 affected the way in which real estate investments are treated. These changes may affect how individual taxpayers can use the income tax credit for rehabilitation. They are discussed briefly below. However, readers are advised to seek advice from an accountant, tax attorney or other professional familiar with these provisions of the Internal Revenue Code.
The Tax Reform Act of 1986 divides income into three categories: "active" (salaries, wages, business income), "portfolio" (interest and dividends), and "passive" (including income from rental real estate). Generally, the law bars individuals (but not corporations) from using losses and credits from passive income sources to avoid taxes on active or portfolio income. Losses and credits from passive income sources are allowed only against other passive income. There are two exceptions to this general rule.
Passive Loss Rules for Rental Real Estate
The first exception applies to taxpayers who "actively participate" in real estate. Under the "passive loss rules" for rental real estate, such taxpayers may take up to $25,000 in losses annually from rental properties. This $25,000 annual limit on losses is reduced for individuals with incomes between $100,000 and $150,000 and eliminated for those with incomes over $150,000.
Passive Credit Exemption
Under the "passive credit exemption," tax credits from rental property can be used to offset the tax owed on up to $25,000 of "active income." This exemption is not a $25,000 credit, but rather the computation of a credit on the tax on up to $25,000 of "active" income. Furthermore, the $25,000 amount is first reduced by losses from rental real estate allowed under the "active participation" rule described above. The passive credit exemption is phased out in the same manner as the "passive loss" exemption.
However, taxpayers who undertake certified rehabilitations of certified historic structures or who undertake low-income housing credits need not "actively participate" in order to qualify for the Passive Credit Exemption. Thus, limited partners--not just the owner or the general partner--may also take advantage of the 20% investment tax credit for historic preservation. (This is not the case with the 10% investment tax credit for buildings built before 1936, however.) This exemption is reduced for individuals with incomes between $200,000 and $250,000. It is phased out entirely for those with incomes over $250,000.
What these provisions mean, in general, is that many taxpayers may not be able to use in one year all of the tax credits earned in a certified rehabilitation project. A taxpayer in the 28% income tax bracket, for example, could apply only $7,000 of tax credits earned to taxes owed for a particular year (28% tax rate x $25,000 passive credit exemption = $7,000). Taxpayers, however, may carry over the unused tax credit to succeeding years.
For more information on tax incentives for historic preservation, contact one of the NPS Regional Offices listed below or your State Historic Preservation Officer (SHPO) . Available material includes:
For more information contact the:
United States Department of the Interior
National Park Service
P.O. Box 37127
Washington D.C. 20013-7127