Historic Tax Credit

What Is the Historic Tax Credit?

The historic tax credit (HTC) is a federal incentive for restoring old buildings and putting them back to use. An owner who rehabilitates a certified historic structure can claim a credit against federal income tax equal to 20% of the project’s qualified rehabilitation expenditures.

A certified historic structure is a building listed in the National Register of Historic Places, or one certified as contributing to a registered historic district. The program dates to 1976. It is run jointly by the National Park Service (NPS), the Internal Revenue Service, and State Historic Preservation Offices.

How It Works

To earn the credit, a project must clear several tests:

• Income-producing use. The building must be depreciable property used for business or rental purposes. Owner-occupied homes do not qualify.
• Substantial rehabilitation. Qualified spending over a 24-month period (60 months for phased projects) must exceed the greater of $5,000 or the building’s adjusted basis.
• Certified work. NPS must certify that the completed work meets the Secretary of the Interior’s Standards for Rehabilitation, which protect a building’s historic character.

Since the Tax Cuts and Jobs Act of 2017, the credit is claimed in five equal annual installments rather than all at once. That law also repealed an older 10% credit for non-historic buildings built before 1936. If the owner sells the building within five years after it is placed in service, the IRS takes back all or part of the credit. The amount recaptured falls by 20 percentage points for each full year the owner holds the property.

Like the Low-Income Housing Tax Credit, the HTC is usually turned into cash up front. A developer typically brings in an investor that contributes tax credit equity in exchange for the credits.

Example

Suppose a developer converts a vacant historic mill into apartments and spends $10 million on qualified rehabilitation costs. The credit would be $2 million, claimed at $400,000 a year for five years. If an investor paid 80 cents per dollar of credit, the project would receive $1.6 million in equity. These numbers are invented for illustration.

Why It Matters for Workforce Housing

Old schools, mills, hotels, and downtown commercial buildings are common candidates for adaptive reuse as housing. Because the HTC carries no income limits, it is one of the few federal tools that can help finance homes for moderate-income households who earn too much for most subsidy programs.

The IRS confirms that the HTC and LIHTC can be used on the same building, with basis adjustments.

Criticisms and Limitations

• A credit spread over five years is worth less to investors up front than one claimed all at once, as the law allowed before 2018.
• Preservation standards and the two-step state and federal review can add cost and time.
• Only designated historic buildings qualify, so the credit does nothing for most older properties.