Federal Historic Tax Credit
By: Clark, Campbell, Lancaster & Munson, P.A.
The Federal Historic Tax Credit, currently at 20%, is a form of public policy to encourage the preservation and rehabilitation of older buildings. Before the Federal Historic Tax Credit, there was no financial incentive to restore or rehabilitate older buildings. In fact, it was more financially beneficial to demolish such buildings so that the owner could take advantage of a deduction related to their demolition.
Q: What are the general requirements for the Federal Historic Tax Credit?
The building must be a certified historic structure. A certified historic structure is any building which is either: (1) listed in the National Register of Historic Places, or (2) located in a registered historic district and certified as being of historical significance to the district.
The building must be placed in service before the beginning of the rehabilitation. The placed in service date generally determines which taxable year the credit may be allowed. The placed in service date is when the appropriate rehabilitation has been completed whereby occupancy of the building would be allowed. If the building is still in service or occupied during the rehabilitation, the placed in service date will be the rehabilitation project completion date.
The building must be substantially rehabilitated. The Historic Tax Credit is not available to owners or lessees who make minor restorations to a building. Instead, the rehabilitation of the building must be substantial. The substantial rehabilitation tests a 24 month period, which is selected by the owner or lessee, whereby the rehabilitation expenditures must exceed the greater of $5,000 or the adjusted basis of the property, whichever amount is greater. The substantial rehabilitation test does not require all rehabilitation work to be completed within this 24 month period. The 24 month period is simply a window to determine whether the rehabilitation is truly substantial.
Q: Can a lessee take advantage of the Federal Historic Tax Credit?
A lessee may claim the credit if the lessee has incurred costs to substantially rehabilitate the historic building. However, there is an additional requirement regarding the term of the lease. If a lessee wishes to claim the credit, the lease term must exceed 39 years for nonresidential real property and exceed 27.5 years for residential rental real property.
The Federal Historic Tax Credit has been one of the most successful programs to revitalize communities, increase property values, and save historic buildings that may otherwise be destroyed. Notably, recent legislation has been introduced to increase the Federal Historic Tax Credit from 20% to 30%.
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