Two credits are currently available for the restoration of historic buildings – a 20-percent credit for the rehabilitation of certified historic structures and a 10-percent credit for nonhistoric buildings built before 1936.
Both credits are jointly managed by the National Park Service and the IRS. The rehabilitation in both cases must be substantial and involve a depreciable building.
The substantial rehabilitation test requires that the cost of rehabilitation exceed the pre-rehabilitation cost of the building. This test must generally be met within two years or five years if the project has multiple phases. A depreciable building is one that must be used for an income-producing purpose for at least five years following the rehabilitation.
Rehabilitation of Certified Historic Structures
The 20-percent credit is available for a certified rehabilitation of a certified historic structure, defined as a building that is listed in the National Register of Historic Places. It may be an individual building or part of a designated historic district. The National Park Service (NPS) must approve an application for this credit.
The application process is a multi-step process. To begin, the application must be submitted in duplicate to the State Historic Preservation Office (SHPO) which retains a copy and forwards the other copy to the National Park Service.
Although both organizations review the projects, only the NPS approves projects for the federal tax credit. Property under a long-term lease may be considered, but the lease must be at least 27.5 years in length for residential property or 39 years for nonresidential property.
Part one of the process is an evaluation of the significance of the project. The State Historic Preservation Office will make a recommendation to the NPS for approving or denying the request.
The second part of the process involves describing the proposed rehabilitation work. This is also submitted to the SHPO, which will provide technical assistance to the owners and will make a recommendation to the National Park Service. Assuming the entire project meets the Secretary of Interior’s Standards for Rehabilitation, the project will be approved.
After the project is completed, the owner submits a Part Three application form requesting final approval of the rehabilitation. Once again, this is submitted to the SHPO. The SHPO forwards the application to the NPS with its recommendation as to certification.
The NPS then evaluates the project and compares it to the rehabilitation as described in the Part Two application. The owners are notified of the approval with a copy sent to the IRS and the SHPO.
Non-historic buildings built before 1936
The 10-percent credit may be available if the structure is not a certified historical structure. The main requirement for consideration is that the building was originally constructed prior to 1936. This credit applies only to commercial buildings rehabilitated for non-residential use, so rental housing does not qualify as it does with the 20-percent credit.
The following three tests must be met to be eligible for this credit.
- At least 50 percent of the building’s external walls prior to the rehabilitation must remain in place.
- At least 75 percent of the external walls must remain in place as either external or internal walls.
- At least 75 percent of the building’s internal structural framework must remain in place.
The credit is available only to the owners of the property. Those holding a long-term lease do not qualify.
There is a 24-month period for rehabilitation expenditures. Any expenditures before the start of the 24-month period are not available for the credit and add to the basis in the property.
If the project is to be completed in phases, application may be made to extend the rehabilitation period to 60 months. In these cases, there must be a written set of plans for the phases of the rehabilitation. The plans must be completed before the actual rehabilitation begins, and the property must be placed in service.
Nuts and Bolts of the Credits
Both credits are claimed on Form 3468, Investment Credit. The amount of the credits may be limited by the alternative minimum tax or passive activity rules. The credits may be carried back one year or forward 20 years.
For details about the credits, see the IRS’s Market Segment Specialization Guide. Consult your CPA before embarking on a rehabilitation project in anticipation of obtaining one of these credits.