During deliberation of the Tax Cuts and Jobs Act, tax credits for the renovation of historic buildings faced an uncertain future. Now many real estate industry professionals are relieved that the valuable 20 percent historic tax credit (HTC) was left intact—if slightly altered.
By retaining the HTC, Congress recognized that incentivizing the rehabilitation of historic buildings is good for the economy—welcome news for developers, lenders and preservationists alike. Let’s take a look at some of the changes that were made to HTCs.
The federal HTC program was established in 1976 to stimulate private sector investment in the rehabilitation and re-use of historic commercial or residential buildings. The HTC program creates jobs and has been one of the most successful and cost-effective community revitalization programs in the U.S. Since its origin during the Reagan administration, it has leveraged over $84 billion in private investment to preserve 42,293 historic properties.
Similar to other states, Texas provides tax relief for the preservation of historic buildings. Since 2015, the Texas Historic Preservation Tax Credit Program has provided a credit worth 25 percent of eligible rehabilitation costs for buildings listed in the National Register of Historic Places, as well as Recorded Texas Historic Landmarks and Texas State Antiquities Landmarks.
Tax Credit Provisions
Prior to the enactment of tax reform, a taxpayer who rehabilitated a historic structure was eligible for a tax credit equal to 20 percent of the taxpayer’s qualified rehabilitation expenditures as long as the structure was listed on the National Register or was otherwise certified by the Interior Secretary as being historically significant. HTCs were claimed in entirety in the year the building was placed in service, subject to a five-year recapture period.
A taxpayer was also eligible for a 10 percent tax credit for qualified rehabilitation expenditures if the structure was not listed on the Federal Register but was originally placed in service before 1936.
Tax Reform Changes
- The new law eliminates the 10 percent credit for pre-1936 building not listed on the National Register.
- The new law restructures the 20 percent credit so that it is taken over a five-year period beginning in the taxable year that the property is placed in service. Previously, all of the credit was generally available the year the renovation was completed. While this change will reduce the value of the credit over time by an average of 14 percent, the HTC remains a substantial and attractive financial incentive to developers.
- A transition rule allows taxpayers who began ownership or the long-term lease of the property as of Dec. 31, 2017, the ability to claim the 20 percent tax credit as long as the ownership or lease continues through the tax credit recapture period. Clarifications are expected to define the transition rule better.
Are you a real estate professional considering the restoration of an older building? It might be worth your while to find out whether the building is certified as a historic structure so that you can take advantage of state and federal HTCs. Currently, the National Register names more than 80,000 locations that are eligible for the credit. You can visit its website to obtain more information, including an application for certification.
Applicants interested in taking advantage of either federal or state HTCs should consult with an experienced real estate accountant to understand the changes and take full advantage of the credits.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.