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RULES FOR TAX
CREDITS
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Tax
Incentives for Historic Preservation
An
Overview of the Federal Income Tax Rules on Rehabilitation Investment
Tax Credit
Federal
historic preservation tax
incentives are available for any qualified project that the Secretary
of the Interior designates as a certified rehabilitation of a certified
historic structure. These incentives were established and
modified by the Tax Reform Act of 1976, the Revenue Act of 1978, the
Tax Treatment Extension Act of 1980, the Economic Recovery Tax Act of
1981 and the Tax Reform Act of 1986.
This tax
credit consists of 20% of
the costs of rehabilitation of a certified historic structure. A
certified historic structure is any structure, subject to depreciation
as defined by the Internal Revenue Code, that is listed individually in
the National Register of Historic Places or which is located in a
registered historic district and certified by the Secretary of the
Interior as contributing to the historic significance of the
district. For purposes of the charitable contributions provisions
only, a certified historic structure need not be a building nor be
depreciable to qualify. A registered historic district is any
district listed on the National Register or any district which is
designated under a state or local statute which has been certified by
the Secretary of the Interior as meeting substantially all the
requirements for the listing of districts on the National Register.
A certified
rehabilitation is any
rehabilitation of a certified historic structure which the Secretary
has certified to the Secretary of the Treasury as being consistent with
the historic character of such structure and, where applicable, with
the district in which such structure is located.
Tax
incentives for
rehabilitation are limited by the Internal Revenue Code to depreciable
structures such as buildings used in a trade or business or held for
the production of income, including commercial or rental residential
properties. Single-family owner-occupied houses are generally not
eligible for the tax credit.
To qualify
for the tax incentives,
property owners must complete the Historic Preservation Certification
Application. Competed applications are sent first to the State
Historic Preservation Officer. The state will forward
applications to the National Park Service, generally with a
recommendation. All projects are reviewed and evaluated in accordance
with the Secretary of the Interior's Standards for Rehabilitation.
These ten standards are broadly worked to guide the rehabilitation of
all historic structures. The underlying concern expressed in the
Standards is the preservation of significant historic materials and
features of a building in the process of rehabilitation. The
Standards apply with equal force to both interior and exterior work and
the National Park Service reviews the entire rehabilitation
project (including any new construction on the site) rather than just a
single segment of work. Certification is based on whether the overall
project meets the Standards.
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I Financial
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Rehabilitation Credit
Rehabilitation
Standards, General
| Treatment Standards
Financial Aspects of the Tax Credits
The
Rehabilitation Investment Tax
Credit is allowed for every dollar spent on a Secretary of the Interior
certified rehabilitation. The rate for the credit is 20% for
historic buildings. There is a 10% credit available for rehabilitations
of non-historic non-residential income-producing properties that were
erected prior to 1936. The tax credit is a dollar for dollar reduction
in federal tax liability subject to certain limitations. The
alternative minimum tax may only be partially offset. A tax expert
should be consulted for specific information.
Graduated
recapture of the credit
will occur of the property is sold within five years of being placed in
service. Recapture will also occur if non-certified alterations are
made within five years or if the building is demolished.
The tax
credit is recognized in
the year the building is placed in service. Tax credits that are
currently unused may be carried back three years and forwarded for
fifteen years.
Substantial
rehabilitation is
required under the rules governing this provision. Generally, this
means that the cost of rehabilitation must exceed the basis value of
the building. The basis value is often calculated by taking the
purchase price for the property and subtracting out the land value and
any depreciation of the building. If a property was purchased for
$100,000 and the land value alone is $25,000 and depreciation of
$25,000 has been taken on the building, then a certified rehabilitation
of the property must total at least $50,000 in order to meet the
substantial rehabilitation test for use of the rehabilitation
investment tax credit.
Qualified
expenditures include the
costs of rehabilitation, construction interest and taxes, architectural
and engineering fees, legal and other professional fees, developers
fees, general and administrative costs, and the costs of a preservation
consultant. Non-qualified expenditures include acquisition costs,
enlargement costs such as constructing an addition, acquisition
interest and taxes, realty fees, paving and other landscaping costs,
and sales and marketing costs. Furniture and furnishings are
generally not included, unless attached to the building. They can be
depreciated on a shorter timeframe.
For
depreciation, generally
straight line depreciation must be used. Industrial real property is
recovered in 31.5 years. Residential income property is recovered in
29.5 years. A property's depreciable base is reduced by the
amount of the rehabilitation tax credit and is therefore 80% of basis
value.
The value of
the rehabilitation
investment tax credit may be realized in a number of ways. Credits
normally increase profits by reducing taxes. The owners of
structures being rehabilitated may obtain cash by selling equity in the
property before it is placed in service which gives the investor a
proportional share of the credit. The possibilities here are infinite.
A charitable
contribution is
available for a qualified conservation contribution or conservation
easement. The corporate deduction of a facade contribution is
restricted to 10% of the corporate taxable income. In general, a
conservation easement restricts the right to alter a building facade or
architectural characteristic. Herein facade means the entire building
exterior. The contribution of a facade increases cash without
acquiring partners. The subsequent restrictions on a property suggest a
careful pre-commitment analysis.
Application
fees are assessed by
the National Park Service for reviews of requests for certification of
rehabilitation except for projects under $20,000. The fee for
projects costing $20,000 to $99,999 is $500. The fee for projects
costing $100,000 to $499,999 is $800. The fee for projects
costing from $500,000 to $999,999 is $1,500. The fee for projects
costing more than one million dollars is $2,500.
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Use of the Rehabilitation Credit by Non-Profit
Organizations
The Federal
Rehabilitation
Investment Tax Credit provides a dollar-for-dollar reduction of federal
tax liability for 20% of the costs of certified rehabilitation
activities to certified historic structures. Non-profit
organizations can utilize this credit by forming a Limited Liability
Company (LLC) that would operate the property for a minimum five-year
period. The non-profit organization could maintain full control
and ownership rights through the LLC. An investor that has federal tax
liability would participate in the LLC and, in effect, purchase the tax
credits from the non-profit organization. The tax credits are
discounted by approximately 10% to attract an investor to the project.
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Types of
Investors
- Banks and other financial
institutions are ideal candidates for these projects. Under the Federal
Community Reinvestment Act, they need to participate in projects in
places that are designated as lower income areas, often center cities
and their surrounding neighborhoods. Banks are often utilized by
non-profit organizations to help finance a rehabilitation project
during the construction phase. The tax credit can become part of
the equity in the project, providing greater loan security and
therefore more favorable financing.
- Locally based
corporations can be ideal partners for non-profit organizations.
They gain local recognition for participating in an important community
enterprise and they can benefit the non-profit organization by
providing a higher return on the tax credit, or by augmenting that
purchase with an outright donation.
- Nationally, there is a
well-established secondary market. Financial brokers from around
the country are looking for projects to invest in that can provide the
rehabilitation credit. These buyers of the tax credit are
concerned only with the value of the credit and "due diligence" issues
such as ensuring the project will survive as an LLC for the five-year
period, no physical changes to the project take place during the review
period that are not approved by the National Park Service, and that
adequate records of expenditures are maintained.
Typical
Eligible Non-Profit Projects
- Historic theater
renovation projects are an increasing source of tax credit projects
because they typically involve landmark buildings where restoration is
a key ingredient of the program, and have income-producing activities
such as theater rentals and concession sales that easily meet the
requirement that the property have an income-producing use for a
minimum five-year review period.
- Non-profit residential
rental housing also provides ideal candidates. This includes
college and university dormitories, fraternities and sororities.
YMCA facilities have been restructured into health clubs and apartment
housing to utilize the tax credit. Neighborhood non-profit
organizations have typically used the credit when buying and renovating
older housing units as part of their goal to improve neighborhoods and
communities.
- Historical societies can
utilize the tax credits, subject to the restriction outlined below, if
they can achieve rental income from leasing an historic property for
events or ongoing activities such as a teahouse, gift shop or offices.
- Cultural museums are
often housed in landmark facilities and can utilize the credit if they
segregate income-producing activities such as restaurants,
multi-purpose auditoriums and bookstores in historic portions of their
complexes.
- Colleges and universities
can utilize the tax credit for academic buildings if they either do not
already own the affected building or set aside a percentage of a
prior-owned building for income-producing activities.
Restrictions
on Properties Currently Owned by Non-Profit Organizations
If a
non-profit organization
is considering purchasing an historic building and rehabilitating it,
the non-profit can form an LLC and become the primary tenant for the
minimum five-year period and then take actual ownership after that
time. However, if a non-profit organization currently owns a
building and plans to continue ownership after the minimum year-year
period, then federal tax regulations require that the non-profit cannot
be a tenant in more than 35% of the property in question during this
five-year period. The following are some examples of how this
requirement can be successfully managed to achieve the tax credit:
- A local historical
society currently owns an historic house museum and plans a major
renovation that qualifies for the tax credit. During the
five-year review period it must rent out 65% of the usable space to
another organization, for example, an antique or crafts shop in some of
the period rooms, or law offices in the historic house parlors.
These activities meet the requirement for income-producing use, provide
a side benefit of rental income and, after the five years have expired,
the society can reclaim all of the space for museum purposes.
- An art museum owns a
complex that includes historic as well as modern buildings. If it
places income-producing activities, such as cafes, meeting halls and
bookstores such that these uses constitute 65% of the space in the
historic part of their complex, the renovation costs of that portion
would earn a 20% credit.
- A university has an
historic campus in a busy metropolitan area. If it can rent out its
classrooms and lecture halls on evenings and weekends for conferences
and other special events such that these periods constitute 65% of the
total usage, these projects would become eligible for the tax credit.
- A college is planning a
major expansion and renovation program that takes place over a number
of years. If it can arrange to temporarily house income-producing
uses in historic buildings for a minimum five-year period, it can
realize the tax credit. Alumni groups, medical research centers,
think tank groups are all possible short-term tenants.
Other
Considerations
- A project should
generally have a minimum cost of at least $1 million, and larger
projects are easier to find tax credit buyers for than smaller
projects.
- Some states have a tax
credit that can "piggyback" onto the federal credit.
- Façade easements
can provide a charitable contribution that can yield additional funds
to selected eligible projects.
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| Tax Incentives
I Financial
Aspects I Use of
Rehabilitation Credit
Rehabilitation
Standards, General
| Treatment Standards
The
Secretary of the Interior's Standards for Rehabilitation
General
Statement of Standards
- Every reasonable effort shall
be made to provide a compatible use for a property which requires
minimal alteration of the building structure or site and its
environment, or to use the property for its originally intended
purpose.
- The distinguishing original
qualities or character of a building, structure or site and its
environment shall not be destroyed. The removal or alteration of any
historic material or distinctive architectural features should be
avoided where possible.
- All buildings, structures and
sites shall be recognized as products of their own time. Alterations
that have no historical basis and which seek to create an earlier
appearance shall be discouraged.
- Changes which may have taken
place in the course of time are evidence of the history and development
of a building, structure or site and its environment. These changes may
have acquired significance in their own right, and this significance
shall be recognized and respected.
- Distinctive stylistic features
or examples of skilled craftsmanship which characterize a building,
structure or site shall be treated with sensitivity.
- Deteriorated architectural
features shall be repaired, rather than replaced, wherever possible. In
the event replacement is necessary, the new material should match the
material being replaced in composition, design, color, texture, and
other visual qualities. Repair or replacement of missing architectural
features should be based on accurate duplication of features,
substantiated by historic physical or pictorial evidence rather than on
conjectural designs or the availability of different architectural
elements from other buildings.
- The surface cleaning of
structures shall be undertaken with the gentlest means possible.
Sandblasting or other cleaning methods that will damage the historic
building materials shall not be undertaken.
- Every reasonable
effort shall be made to protect and preserve
archaeological resources affected by or adjacent to any project.
- Contemporary design for
alterations and additions to existing properties shall not be
discouraged when such alterations and additions do not destroy a
significant historical, architectural or cultural material, and such
design is compatible with the size, scale, color, material and
character of the property, neighborhood or environment.
- Wherever possible, new
additions or alterations to structures shall be done in such a manner
that if such additions or alterations were to be removed in the future,
the essential form and integrity of the structure would be unimpaired.
In addition to these above
standards, the U. S. Department of the Interior's National Park Service
has more detailed Guidelines for Rehabilitating Historic Buildings. The
Park Service also has a series of detailed Preservation Briefs on
various preservation-related issues. The National Trust for Historic
Preservation provides preservation assistance through its fine
publications and outreach programs. To contact the National Trust,
please call (202) 673-4000 or write to them at 1785 Massachusetts
Avenue, N.W., Washington, D.C. 20036. The Ohio Historic Preservation
Office; 567 E. Hudson St., Columbus, Ohio 43211, (614) 297-2470);
manages state and federal preservation programs for Ohio and has much
information available. The Cleveland Landmarks Commission may be
reached by calling 664-2531.
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| Tax Incentives
I Financial
Aspects I Use of
Rehabilitation Credit
Rehabilitation
Standards, General
| Treatment Standards
Standards
for the Treatment of Historic Properties
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Standards
for Preservation
- A property shall be used
as it was historically, or be given a new use that maximizes the
retention of distinctive materials, features, spaces and spatial
relationships. Where a treatment and use have not been identified, a
property shall be protected and, if necessary, stabilized until
additional work may be undertaken.
- The historic character
of a property shall be retained and preserved. The replacement of
intact or repairable historic materials or alteration of features,
spaces and spatial relationships that characterize a property shall be
avoided.
- Each property shall be
recognized as a physical record of its time, place and use. Work needed
to stabilize, consolidate and conserve existing historic materials and
features shall be physically and visually compatible, identifiable upon
close inspection, and properly documented for future research.
- Changes to a property
that have acquired historic significance in their own right shall be
retained and preserved.
- Distinctive materials,
features, finishes, and construction techniques or examples of
craftsmanship that characterize a property shall be preserved.
- The existing condition
of historic features shall be evaluated to determine the appropriate
level of intervention needed. Where the severity of deterioration
requires repair or limited replacement of a distinctive feature, the
new material shall match the old in composition, design, color and
texture.
- Chemical or physical
treatments, if appropriate, shall be undertaken using the gentlest
means possible. Treatments that cause damage to historic materials
shall not be used.
- Archaeological resources
shall be protected and preserved in place. If such resource must be
disturbed, mitigation measures shall be undertaken.
Standards
for Rehabilitation
- A property shall be used
as it was historically or be given a new use that requires minimal
change to its distinctive materials, features, spaces, and spatial
relationships.
- The historic character of
a property shall be retained and preserved. The removal of distinctive
materials or alteration of features, spaces, and spatial relationships
that characterize a property shall be avoided.
- Each property shall be
recognized as a physical record of its time, place, and use. Changes
that create a false sense of historical development, such as adding
conjectural features or elements from other historic properties, shall
not be undertaken.
- Changes to a property
that have acquired historic significance in their own right shall be
retained and preserved.
- Distinctive materials,
features, finishes, and construction techniques or examples of
craftsmanship that characterize a property shall be preserved.
- Deteriorated historic
features shall be repaired rather than replaced. Where the severity of
deterioration requires replacement of a distinctive feature, the new
feature shall match the old in design, color, texture, and, where
possible, materials. Replacement of missing features shall be
substantiated by documentary and physical evidence.
- Chemical or physical
treatments, if appropriate, shall be undertaken using the gentlest
means possible. Treatments that cause damage to historic materials
shall not be used.
- Archaeological resources
shall be protected and preserved in place. If such resources must be
disturbed, mitigation measures shall be undertaken.
- New additions, exterior
alterations, or related new construction shall not destroy historic
materials, features, and spatial relationships that characterize the
property. The new work shall be differentiated from the old and shall
be compatible with the historic materials, features, size, scale and
proportion, and massing to protect the integrity of the property and
its environment.
- New additions and
adjacent or related new construction shall be undertaken in such a
manner that, if removed in the future, the essential form and integrity
of the historic property and its environment would be unimpaired.
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Tax Incentives
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Aspects I Use of
Rehabilitation Credit
Rehabilitation
Standards, General
| Treatment Standards
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