Recently we listed a beautiful historic building in a vibrant downtown area. This property is the classic vacant office building, a type that has begun to proliferate in the wake of COVID. However, the excellent location and classic historic architecture begged for a new life.
The challenges of renovating a historic building can mount up as an investor puts together a proforma. Things like sprinkler systems, emergency access points, and modern HVAC are all items that would be required to renovate a building like this from office to apartments.
Fortunately, Uncle Sam is here to help. The Historic Tax Credit is a way to offset the cost of turning this type of property into a money-generating asset. The National Park Service, as an arm of the federal government, facilitates this program, and Pennsylvania also has a similar historic property tax credit of its own.
What Is the Historic Tax Credit Program?
Investors who are renovating or repurposing historic buildings may qualify for the Historic Tax Credit, or HTC. Under this program, the federal government provides tax credits to investors equal to 20% of the approved cost of renovating historic buildings.
How the Historic Tax Credit Program Works
Through the program, investors in qualified historic buildings are granted a 20% tax credit against rehabilitation expenses, though not all expenses qualify. Only designated qualified rehabilitation expenses (QREs) count toward the 20%. QREs generally include costs associated with the operational and maintenance components of a building, such as:
- Floors, walls, partitions, and ceilings
- Doors, windows, stairs, and chimneys
- Tiles, paneling, and other permanent coverings
- Lighting fixtures, electrical wiring, and plumbing components
- Elevators, escalators, fire escapes, and sprinkler systems
In contrast, some common expenses do not qualify for the credit. These ineligible expenses include:
- Cabinets, appliances, furniture, and tacked carpeting
- New decks, porches, fencing, and landscaping
- Planters, parking lots, signage, and sidewalks
- Financing fees, feasibility studies, and leasing costs
- Structural demolition costs
Some financing fees may still qualify as approved costs, such as construction loan interest and engineering.
Which Buildings Qualify?
Property eligibility for the historic tax credit program generally includes buildings listed in the National Register of Historic Places as certified historic structures, or buildings situated in a registered historic district and certified by the National Park Service as historically significant. Eligible property types include multifamily apartment buildings, office buildings, warehouses, and industrial buildings, and the building must be income-producing for at least five years.
Rehabilitation Rules for the HTC Program
To be approved for the tax credit, a project must meet the standards for rehabilitation and repurposing. These standards are set to encourage staying close to the original history and architecture of the building. Restoring instead of replacing is the key focus.
The PA Historical Tax Credit Program
Pennsylvania’s tax credit may be applied against the tax liability of a qualified taxpayer, which includes an individual, corporation, business trust, limited liability company, limited liability partnership, or any other form of legal business entity. Tax credits awarded to a qualified taxpayer cannot exceed 25% of the qualified expenditures determined by the application for the completed project, and total tax credits awarded to a single taxpayer cannot exceed $500,000 in any fiscal year.
Pennsylvania’s application program operates on a first-come, first-served basis, with an application window that opens each fall. Credits are distributed proportionally across each region.
If you’re curious whether a building you own or are interested in is located in a federal historic district, the National Park Service maintains a searchable map. And if you’re looking for an edge in your investments and would like to discuss strategy to increase your return, contact us for a no-obligation consultation.
The HTC isn’t the only tax credit worth knowing about if you own or develop multifamily property. We’ve also covered the 45L Tax Credit, which rewards energy-efficient new construction and major renovations.
