Federal Historic Preservation Tax Incentives
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The Federal Historic Preservation Tax Incentives program was created to help preserve historic buildings from demolition and to encourage reuse of old structures. This program is managed by both the National Park Service (NPS) and the Internal Revenue Service (IRS). There are two basic incentives; one for the restoration of historic properties and one for non-historic properties.
The Federal Historic Preservation Tax Incentives are available for buildings that are National Historic Landmarks, listed in the National Register or contribute to National Register Historic Districts. The Incentives are also available for the rehabilitation of older buildings built before 1936 that do not have a historic status associated with them. All restored buildings and properties must be income-producing and rehabilitated according to standards set by the Secretary of the Interior. A substantial number of these buildings may be located in distressed urban areas. These tax incentives offer a unique opportunity for assistance with the cleanup and rehabilitation of historical properties.
The Preservation Tax Incentives reward private investment through rehabilitating historic properties such as offices, retail stores, warehouses, factories and rental housing. The current tax incentives offered by this program are two different tax credits, which directly reduce the amount of tax owed by a property owner. These two tax credits are mutually exclusive and their use depends on the type of building.
- A 20 percent tax credit for the certified rehabilitation of certified historic structures.
- A 10 percent tax credit for the rehabilitation of non-historic, non-residential buildings built before 1936.
The taxpayer uses the three following entities for claiming the tax credits:
The 20 percent tax credit is available for historic properties rehabilitated for commercial, industrial, agricultural or rental residential purposes, but not for properties used exclusively as an owner’s private residence. A certified rehabilitation is a rehabilitation of a certified historic structure that is approved by the NPS as being consistent with the historic character of the property. The NPS must approve all rehabilitation projects seeking to use the 20 percent tax credit. A certified historic structure can be defined as a building that is listed individually on the National Register of Historic Places or a building that is located in a registered historic district and certified by the NPS as contributing to the historic significance of that district. Owners seeking to claim the 20 percent tax credit must undergo a detailed application and certification throughout the rehabilitation work process. Only projects which meet the Standards for Rehabilitation as set forth by the NPS may claim the 20 percent tax credit. Generally, the tax credit is claimed for the year the rehabilitated building is placed back in service. The owner of the building must hold it for five years after completing rehabilitation or risk recapture of the tax credit. In addition, a rehabilitation project must meet several criteria set up by the IRS, including:
- The building must be depreciable.
- The rehabilitation must be substantial (i.e. expenditures must be greater than $5,000).
- The property must be returned to use.
- The building must be a certified historic structure when it is placed in service.
The 10 percent tax credit is available for the rehabilitation of non-historic buildings built before 1936. This credit applies only to non-residential use properties. Former factories or manufacturing centers located on a contaminated property — characteristics common to many brownfields sites — would easily qualify for this tax credit. Projects which plan on utilizing this tax credit must meet several physical structure tests, including:
- At least 50 percent of the building’s external walls which exist at the time the rehabilitation begins must remain in place as external walls.
- At least 75 percent of the building’s existing external walls must remain in place as either external or internal walls.
- At least 75 percent of the buildings internal structural framework must remain in place.
American Can Factory, New Orleans, Louisiana
The American Can Factory in New Orleans, Louisiana was converted into a housing complex containing both high-end and affordable units. The American Can Factory originally consisted of six buildings. After the factory closed, the New Orleans Historic District and Landmark Commission and the City Council designated it as an historic site in 1984. It was subsequently placed on the National Historic Register. Historic Preservation, Inc. purchased the property and proceeded with rehabilitation efforts. In total, the property required $1.7 million in demolition costs and is a $43 million project overall. The developer, who received the Federal Historic Preservation Tax Credits, was able to sell them to the Kimberly Clark Corporation in exchange for a cash investment in the project of $8,500,000.
Use of the federal historic tax credits at the American Can Factory required that the project strictly maintain the historic look and feel of the building. Redevelopment plans included efforts to retain a large portion of the historic aspects of the property. The apartments retained existing signs, factory markings, giant metal doors, weights, huge windows and massive beams. The developer also worked with numerous local, state and federal partners to take advantage of funding opportunities. Several other federal and state incentives were used for this project, including the Community Development Block Grants and Brownfields Economic Development Initiative programs administered by the Department of Housing and Urban Development. This project utilized the 20 percent tax credit which produced an estimated $7,000,000 in federal tax credits.
These Tax Incentives can be especially attractive for cleanup and restoration of either historic or pre-1936 properties. The types of projects that can be included in these categories are extensive, including schools, factories and warehouses. Many of these properties may also be located in federal (i.e. Renewal Communities/Empowerment Zones/Enterprise Communities) or locally designated zones which offer further incentives for brownfields cleanup and redevelopment projects.
The developer of a brownfields property can choose to sell tax credits in exchange for a cash investment in the project. This can translate into more project funding if a developer would rather have a larger cash flow for cleanup and/or redevelopment efforts than the tax credits.
Stakeholders interested in using this tax incentive should be aware of the opportunities to combine it with other tax initiatives and thereby increasing potential project savings. The tax credits can also be used in conjunction with other tax incentives such as:
- The Internal Revenue Code and the Department of Treasury provide for income and estate tax deductions for charitable contributions of interests in historic property. This was set forth in the Tax Reform Act of 1986. Owners of contaminated properties may be willing to consider property interest donations with this tax provision and take the tax deduction.
- The Low Income Housing Tax Credit which provides either a nine percent or four percent tax credit per year for 10 years, depending on whether projects received certain federal assistance such as tax exempt bonds or below-market federal loans. If the maximum amount of each credit were obtained and utilized, the credits would have a combined value of 29 percent. For example, if a project has converted an historic school into condos, the housing project would be completed in an historic structure and therefore eligible for the 20 percent credit. If the condos being developed have a low-income housing portion, they would be eligible for the nine percent low income tax credit (assuming no other federal financing was used.) The investor who has the tax credits would be able to use the 20 percent once the building was placed back in service. The nine percent tax credit is available to the investor per year, for 10 years. The American Can Factory in New Orleans are examples of projects which successfully combined these two tax credits.
Federal Historic Preservation Tax Incentives, Heritage Preservation Services
1201 Eye St. NW
Washington, DC 20005
The National Park Service (a division of the Department of the Interior) Web site is a government run site that provides access to detailed tax incentive information, regulations, applications and rehabilitation standards.