The Historic Tax Credit (HTC) is a federal tax incentive that supports the preservation and adaptive reuse of historic and older structures. The HTC is widely considered to be one of the country’s most successful tax incentive programs, with almost $70 billion in redevelopment activity since the first preservation tax programs were created in 1976.
Why HTC tax credits?
>> Investors are able to earn a highly predictable return with a short recovery period, with the entirety of the tax credit taken in the year that the property is placed into service.
>> Developers use historic tax credit equity to support the additional costs associated with restoration and adaptive reuse projects.
>> Government agencies use the historic tax credit to facilitate urban renewal efforts, often using them as cornerstone projects to revitalize neighborhoods and convert obsolete properties into useful developments.
Historic preservation strikes a balance between maintaining a building’s historic and cultural value, and in making it meaningful and productive to the users of today. Historic redevelopment is viewed not just as a means of protecting the past, but also as an engine for driving current and future economic growth, improving communities and increasing property values.
In keeping with these objectives, historic preservation rules endeavor to preserve the style, character and aesthetic quality of historic properties while producing income and appreciation for those who operate them. The HTC supports the additional costs associated with preservation while providing developers with a source of equity to fund them. In order to encourage such developments, the HTC returns the associated tax benefit to the investor as quickly as possible once the improvements are completed.
The Low Income Housing Tax Credit (LIHTC) is often used in conjunction with the Historic Tax Credit in the development of affordable housing. Click here for information about the Section 42 LIHTC program.
How the HTC works:
A tax credit provides a dollar-for-dollar reduction in tax liability to owners and investors. Accordingly, $1 of tax credit provides substantially greater tax savings than does $1 of tax deduction. Click here for a sample comparison of tax credits vs. tax deductions.
The amount of available tax credit is based upon eligible construction and redevelopment costs. As a result of the 2017 “tax reform” legislation, historic credits are taken for a period of five years once the property is placed in service. Prior to tax reform, the tax credit was delivered in its entirety in the first year once the property was placed in service.
>> A 20% credit is available for substantial rehabilitation expenses for qualified properties. Eligible properties must either be certified historic structures that are listed in the National Register of Historic Places or else be historically significant buildings or located in registered historic districts. Multifamily developments, including affordable housing properties, are eligible for the 20% credit.
>> A 10% credit is available for substantial rehabilitation expenses for properties that were constructed prior to 1936 but are lacking a historic designation. Residential uses are not eligible for the 10% credit, although hospitality uses are permitted.
Historic tax credit properties must remain in compliance with historic preservation regulations for five years following completion, including restrictions on transfers of ownership and subsequent rehabilitation work.
Legislative authority, administration and regulation:
The HTC has its origins in the National Historic Preservation Act of 1966 (NHPA). The NHPA established the National Register of Historic Places and State Historic Preservation Officers (SHPOs), both of which play critical roles in the Historic Tax Credit program. Click here for a link to the Act (Source: National Parks Service).
The use of tax incentives to encourage historical preservation began in 1976 with the introduction of an accelerated depreciation benefit. A tax credit was added in 1978, which was modified in 1981. The current two-tier structure was created as part of the Tax Reform Act of 1986 (TRA 86).
The program is administered jointly by the National Park Service (NPS) and State Housing Preservation Officers (SHPOs), in cooperation with the IRS. The 50 states, District of Columbia, and several US territories (Puerto Rico, American Samoa, US Virgin Islands, Guam, Northern Mariana Island, Palau, Marshall Islands, and Micronesia) each maintain a SHPO office that works with NPS to identify historic properties, serves as an initial point of contact with developers, and provides technical assistance. Click here for a list of SHPOs (Source: National Conference of State Historic Preservation Officers).
Section 47 of the Internal Revenue Code is the primary legislation governing the historic tax credit. Click here for a link to the statute (Source: Cornell University U.S. Code Collection.)
Westmont and our partners at TheoPRO can serve your needs throughout the United States. Please do not hesitate to contact us for more information about our consulting and advisory services for real estate acquisition, asset management and tax credits, including the Low Income Housing Tax Credit (LIHTC) and Historic Tax Credit (HTC), as well as other real estate matters. Click here to learn more about our team.
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