Friday, December 21, 2012

Do You Really Know How Historic Tax Credits Work?

HBI is fortunate to have Matthew Welch, a recent graduate of the Boston University School of law, working here since September as a university-sponsored legal intern.  Among several projects he’s working on, Matt has been helping HBI formulate policies and procedures for utilization of the State and Federal Historic Rehabilitation Tax Credits, incredibly important incentives for preservation that are also very complex.  Matt posts answers here to HBI’s three most frequently asked questions about historic tax credits. 

To encourage private sector investment in the rehabilitation and preservation of historic buildings, the federal government began offering tax credits in 1976.  Since its inception, the federal historic tax credit program has encouraged the rehabilitation of more than 38,000 historic properties across the country representing $92 billion in private investment. This approach to community revitalization has been so successful that nearly half the states now offer similar programs. 

The federal tax credit operates as a dollar-for-dollar reduction of federal income tax liability and may be available to developers who rehabilitate a certified historic structure.  A certified historic structure is defined as any building that is either (a) listed in the National Register of Historic Places, or (b) located in a registered historic district and certified by the Secretary of the Interior as being of historic significance to the district.  To be eligible for the credit, the rehabilitation expenditures must exceed the adjusted basis of the property, which is basically defined as the purchase price of the property, minus the value (or cost) of the land, plus any capital improvements made since acquisition. 

The federal historic tax credit program is administered by each state's historic preservation office and requires approval from the National Park Service, a division of the U.S. Department of the Interior.  Developers seeking the credit must go through a three-part application process (or two-part, if the building is already listed on the National Register of Historic Places) governed by regulations and procedures of the National Park Service and IRS.  Before approving the application, the State Historic Preservation Office and the National Park Service review the rehabilitation work to ensure that it complies with the Secretary of the Interior’s Standards for Rehabilitation and that the rehabilitated building is consistent with the historic character of the property or the district in which it is located.  Once approved, the developer may claim a tax credit equal to 20% of the qualifying rehabilitation expenses.

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