Federal tax credits — your questions answered
What are the federal tax credits?
The Federal Investment Tax Credit (ITC) program gives:
- A 20% tax credit (not just a deduction) to owners who rehabilitate historic buildings
- A 10% tax credit to owners who renovate non-historic buildings constructed before 1936.
In both instances the ITC is based on a percentage of the rehabilitation costs and does not include the purchase price.
The tax credit applies to the building owner’s federal income tax for the year in which the project is completed and approved. If it is not all needed in that year, the tax credit may be carried back one year or forward up to 20 years.
Example: 20% of a $75,000 rehabilitation = $15,000 federal tax credit.
Implications of the December 2017 tax reform passed by Congress
The tax reform bill recently passed by Congress made some changes to the federal historic tax credit program. The National Park Service provided this general language about the new law:
On December 22, 2017, Public Law No: 115-97 (Pub. L. 115-97) was signed and enacted, amending the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. Pub. L. 115-97 (Sec. 13402) modifies the 20% Historic Rehabilitation Tax Credit as well as provides certain transition rules. These and other changes to the Internal Revenue Code may affect a taxpayer’s ability to use the 20% Historic Tax Credit. Pub. L. 115-97 also repeals the 10% Rehabilitation Tax Credit for non-historic buildings. The text of Pub. L. 115-97 is available at www.congress.gov.
Applicants requesting historic preservation certifications by the National Park Service as well as others interested in the use of these tax credits are strongly advised to consult an accountant, tax attorney, or other professional tax adviser, legal counsel, or the Internal Revenue Service regarding the changes to the Internal Revenue Code related to Pub. L. 115-97.
Novogradac & Company, an accounting firm that specializes in tax credits, offered the following assessment:
The bill eliminates the 10 percent non-historic credit and requires the 20 percent credit be taken over five years, rather than when the property is placed in service under previous law. Source:https://www.novoco.com/news/trump-signs-tax-cuts-and-jobs-act
We will share more details as they come available.
Does my building qualify?
The 20% ITC is available for buildings listed in the National Register of Historic Places that, after renovation, are used for commercial or residential rental use.
The 10% ITC is available for any pre-1936 building that is not listed in the National Register and is being used for commercial but not residential rental purposes. The work does not have to be reviewed for this credit.
Neither federal ITC is available for the rehabilitation of a private residence. However, the Utah Tax Credit is available for the certified rehabilitation of historic residential buildings.
What rehabilitation work qualifies?
20% ITC: The work may include interior and/or exterior repair, rehabilitation, or
restoration, including historic, decorative, and structural elements as well as mechanical systems.
All of the work must meet the Secretary of the Interior’s Standards for Rehabilitation or the tax credit cannot be taken on any portion of the work. See a great illustrated guide from the NPS
Depending on the historic conditions and the specifics of the proposed rehab work, some examples of eligible work items include:
- repairing/upgrading windows
- plumbing repairs and fixtures
- refinishing floors, handrails, etc.
- repairing or replacing roofs
- compatible new kitchens & baths
- reversing incompatible remodels
- painting walls, trim, etc.
- repointing masonry
- reconstructing historic porches
- new furnace, A/C, boiler, etc.
- new floor and wall coverings
- electrical upgrades
- necessary architectural, engineering, and permit fees
The purchase price of the building, site work (landscaping, sidewalks, fences, driveways, etc.), new additions, work on outbuildings, and the purchase and installation of moveable furnishings or equipment (window coverings, refrigerators, etc.) do not qualify for the credit.
Tax Issues or Questions?
For more information:
How do I apply for the credit?
The National Park Service requires that you work through us (the State Historic Preservation Office, or SHPO) on your application. You should submit the first two sections of the NPS’s three-part application to us as early as possible.
We strongly recommend that you submit an application before starting work. Any work you begin without prior NPS approval is done at your own risk. Once you have begun work, changes to bring the project into conformance with the Secretary of the Interior’s Standards for Rehabilitation can be difficult, expensive, or occasionally impossible to make.
As part of the application you will need to submit:
- Photographs showing all areas of work (interior and exterior) prior to the beginning of the rehabilitation.
- Any construction drawings or other technical information necessary to completely understand the proposed project.
- Photographs of the completed work.
Feel free to contact us during any part of the process.
How much money must I spend to qualify for the federal tax credit?
The rehabilitation expenditures must exceed the greater of either the “adjusted basis” of the building or $5,000. “Adjusted basis” is the purchase price minus the value of the land, minus any depreciation already taken by the current owner of the building, plus any capital improvements.
Example 1 (a recent purchase):
$130,000 (purchase price)
– $33,000 (land)
$97,000 (adjusted basis)
Rehabilitation expenses must exceed the adjusted basis ($97,000).
Example 2 (long-time ownership):
$130,000 (purchase price)
– $70,000 (depreciation)
– $33,000 (land)
+ $15,000 (capital improvements)
$42,000 (adjusted basis)
Rehabilitation expenses must exceed the adjusted basis ($42,000).
When can I sell my rehabilitated building?
In order to avoid any recapture of the tax credit by the federal government, you must keep the building for least five years from the date you complete the project. The recapture amount ranges from 100% of the tax credit if the building is sold within the first year, to 20% of the credit if it is sold within the fifth year.
For more information, contact:
Amber Anderson, 801-245-7277, firstname.lastname@example.org
Roger Roper, 801-245-7251, email@example.com
State Historic Preservation Office
Utah State History
300 S. Rio Grande Street
Salt Lake City, Utah 84101