written by Blair Groves

historic rehabilitation tax credit lendingIn part one we reviewed the basics of historic rehabilitation and the importance of understanding ownership structure. Click here to read part one.

What Properties Qualify?

There are two different tax credits for historic rehabilitation, commonly known as the 10% and 20% credits.  Properties qualifying for the 10% credit are those that were placed into service before 1936.  These buildings cannot be used for residential rental purposes and there are specific internal/external wall preservation requirements.  Properties that qualify for the 20% credit are those that are listed on the national register or are located in a Registered Historic District and listed as being of significance to that district.  The building must be a certified historic structure and the rehabilitation must be a certified rehabilitation by the National Parks Service.  The 10% credit cannot be claimed on a certified historic structure under any circumstance.

How is the Tax Credit Calculated?

The dollar value of the tax credit is computed by taking the Qualified Rehabilitation Expenditures (QREs) by the tax credit percentage, being either the 10% or 20% referenced above. QREs generally include the following costs, related to rehabilitation and not acquisition, which are capitalized to the building:

  • Hard costs
  • Insurance premiums
  • Legal costs
  • Development fees
  • Site survey fees
  • Architectural & engineering fees
  • Interior demolition
  • Construction period interest and taxes
  • Additions (additional rehabilitation that does not go beyond the physical planes of the original building)

These QREs should generally be taken into account for the taxable year in which the building is placed in service.  The full credit is received the year the project is placed in service.  The major risk after the project has been placed in service and the tax credits have been received is recapture.  Recapture occurs if, within five years of being placed in service:

  • Ownership of the property changes,
  • The property ceases to be investment credit property,
  • Sale of a partnership interest, or
  • Reduction of a partner’s interest to less than 2/3 of the original ownership interest

The recapture amount is equal to 100% of the credit claimed and used to reduce tax if the recapture event occurs before the first anniversary of the placed in service date, and is reduced by 20% for each subsequent year.

Part 3 is coming, check back again. Contact us if you have any questions 417-881-0145.