CDFA Spotlight: Federal Historic Preservation Tax Incentive Program

Rehabilitation tax credits were established to discourage unnecessary demolition of older buildings and to slow capital flight from older urban areas. This incentive offers a credit against total federal taxes owed, which is taken for the year in which the renovated building is put into service. The qualified rehabilitation credit is equal to 20% of renovation or construction costs, with pre-1936 buildings in non-residential income-producing use qualifying for a 10% credit. The credit is well suited to complement brownfield developments, and property tax abatements and low interest loans are the most commonly used companion incentives.

The Secretary of the Interior’s Standards for Rehabilitation provide guidance for the rehabilitation of historic buildings. These Standards do not require restoration, but allow some alteration that may be necessary in order for the historic building to provide an efficient contemporary use. However, the rehabilitation project must not damage, destroy, or cover those exterior or interior materials or features that define the building’s historic character. To be eligible to receive the tax credits the rehabilitation project must be consistent with the historic character of the property and it must meet all ten standards. The Secretary’s Ten Standards can be reviewed at http://www.cr.nps.gov/hps/tps/tax/rehabstandards.htm.

There are four factors that can help you decide whether your rehabilitation project proposal would meet the basic application requirements for the 20% tax credit.

1. The historic building must be listed in the National Register of Historic Places, either individually or as a contributing building within a historic district.

2. After rehabilitation, the historic building must be used for an income-producing purpose for at least five years. Owner-occupied residential properties do not qualify for the federal rehabilitation tax credit.

3. The project must meet the "substantial rehabilitation test." In brief, this means that the cost of rehabilitation must exceed the pre-rehabilitation value of the building. Generally, this test must be met within two years or within five years for a project completed in multiple phases.

4. The rehabilitation work must be done according to the Secretary of the Interior's Standards for Rehabilitation. These are ten principles that, when followed, ensure the historic character of the building has been preserved in the rehabilitation. They can be summarized in three phrases:

- Preserve historic materials (tiles, bricks, fixtures, ornamentation, etc.)
- Preserve distinctive features (cornices)
- Preserve important interior spaces (lobbies, ballrooms, etc.)

The following broad conditions can also help determine whether a project is eligible for the 20% tax credit.

Physical Integrity
The 20% tax credit for historic preservation is meant to preserve historic buildings, and not to create buildings that look old, but that are in effect new buildings. Thus, the Preservation Tax Incentives are not available where there is insufficient historic material to preserve at the outset of the rehabilitation. Once the integrity of a building has been lost due to deterioration, damage, or previous alterations, it can never be regained. While new material can exactly copy significant features, material integrity itself can never be re-created. It is important to select a building for rehabilitation that retains its basic physical integrity before rehabilitation.

Non-historic Surface Coverings
Some historic buildings have been covered with non-historic surface coverings that obscure the building underneath. In these cases, it may be necessary to remove the covering to make sure that there is enough historic building material remaining that the building still qualifies as historic.

Multiple Buildings
Farms, mills, and other historic properties often have more than one building. For properties with multiple buildings that were functionally related historically, the rehabilitation certification decision will be based on the effect of the overall rehabilitation on the entire property, and not on each structure or individual component.

Moved Buildings
Moving a historic building can jeopardize its listing in the National Register of Historic Places, and special procedures must be followed to ensure its continued listing. Likewise, moving a building into or within a historic district may jeopardize its ability to contribute to the significance of the district. If a building will be moved as part of the rehabilitation project, consult with the SHPO as soon as possible.

Demolition
Projects that involve demolition require careful planning to ensure approval. This is true whether whole buildings will be demolished or only parts of a structure.

Technical Assistance
If the work project is not too large or too complicated, the owner can often complete the application process and oversee the project without having to hire a consultant. The staff of the State Historic Preservation Office (SHPO) can guide an owner through the application process. However, for many projects, and especially for large projects, having a preservation professional familiar with the 20% tax credit program to coordinate the application can make a tremendous difference in the quality of a project and the ease of the review process. Depending on the scope of the rehabilitation project, it may be advisable to assemble a team of professionals, which may include an architect, engineer, historic preservation consultant, attorney, accountant, or craftsman, in addition to the building contractor.

The Standards for Rehabilitation allow for “alterations” as an integral part of the process of updating a historic building for a new or continuing use. Rehabilitation projects can involve a variety of changes to a historic building; some changes are more complex than others and require careful thought in the planning stages of a proposal. Incompatible rehabilitation work can result in loss of the 20% tax credit.

To help owners and developers select work approaches that will meet the Secretary of the Interior’s Standards for Rehabilitation, helpful guidance is provided for some of the especially problematic treatments for the exteriors. A link to guidance on storefronts, windows, new additions, adjacent construction, and approaches to interior work are provided at: http://www.cr.nps.gov/hps/tps/tax/incentives/avoiding_1.htm

One of the federal government’s most successful and cost-effective community revitalization programs, the Preservation Tax Incentives reward private investment in rehabilitating historic properties such as offices, rental housing, and retail stores. Abandoned or under-used schools, warehouses, factories, churches, retail stores, apartments, hotels, houses, and offices in many cities have been restored to life in a manner that retains their historic character. The Preservation Tax Incentives have also helped to create moderate and low-income housing in historic buildings.

There are also several Federal Historic Preservation Grants available.

Program Notes

Since 1976, the Historic Preservation Tax Incentives have produced these benefits for the nation:

• Rehabilitated more than 32,000 historic properties
• Stimulated over $33 billion in private investment
• Rehabilitated more than 185,000 housing units and created over 140,000 housing units, of which over 75,000 are low and moderate-income units