The Federal Ten Percent Rehabilitation Tax Credit and How You Can Qualify For It
At PVN, we are working with one of our clients to explore the feasibility of qualifying several building rehabilitation projects for the federal ten percent rehabilitation tax credit (RTC). While the RTC is a powerful incentive applicable to a vast number of buildings, it is rarely part of popular dialog about preservation in this country. Compared to the more widely discussed 20% federal historic tax credit (HTC), the ten percent credit has less strings attached and potentially can be applied to a greater number of projects.
In order to qualify for the RTC:
- The property must be categorized as a building, not a structure.
- The building must be depreciable, and only applies to non-residential uses--hotels can qualify, apartments cannot.
- The property must not be a "certified historic structure," which the National Park Service defines as a building that is listed individually in the National Register of Historic Places or a building that is located in a registered historic district and certified by the National Park Services as contributing to the historic significance of that district.
- The building must have been originally placed in service (i.e. built) on or before December 31, 1935.
- The current rehabilitation project must qualify as a "substantial rehabilitation" meaning that qualified expenditures will exceed the greater of $5,000 or the building's adjusted basis before rehabilitation.
- The qualified rehabilitation expenditures must be drawn from a 24-month measurement period.
- The qualified rehabilitation expenditures must be calculated via straight-line depreciation.
- The rehabilitation must meet three requirements for existing wall retention:
- A minimum of 50% of the building's existing exterior walls must be retained in place.
- A minimum of 75% of the building's combined existing interior and exterior walls must be retained in place.
- A minimum of 75% of the building's existing interior structural framework must be retained in place.
It is important to consider and plan for the ten percent tax credits early. Ideally, the decision should be made before construction starts in order to properly track expenses, establish the proper ownership of the building, and retain any specialized accounting or consulting services.
These requirements differ from those of the better-known twenty percent historic tax credit in some important ways:
1. Eligibility for the twenty percent tax credit is based on a property's historic significance, as reflected in the property's eligibility to be listed in the National Register of Historic Places, and on the project's compliance with the Secretary of the Interiors Standards for the Rehabilitation of Historic Properties. Eligibility for the ten percent tax credit is based on the building's age and the amount of money invested in the project - historic significance and design standards are not considerations for the 10% RTC.
2. Because the National Register of Historic Places and the Secretary of the Interior's Standards fall within the jurisdiction of the National Park Service (NPS), NPS actually administers the twenty percent tax credit. Since economic requirements are the primary indicator of a successful 10 percent tax credit qualification, the Internal Revenue Service administers this credit.
3. Use of the twenty percent tax credit is well documented by NPS and also by the Center for Urban Policy Research at Rutgers University, an objective outside observer of the tax credits. Both NPS and Rutgers publish yearly summaries of the usage and economic impacts of the 20 percent tax credit, detailing everything from location and type of projects to the number of jobs created through use of the credit and income generated by properties taking advantage of the credit. These documents can help to validate the usefulness and effectiveness of the 20 percent tax credit to skeptics. Nothing of the sort exists for the RTC.
However, recent legislative proposals have sought to make the RTC more accessible and transparent. The National Trust for Historic Preservation and the Historic Tax Credit Coalition are lobbying for legislation called the Creating American Prosperity through Preservation Act (CAPP Act) which would expand the capabilities of the current historic preservation bill. The CAPP Act proposes to make the RTC available to buildings "50 years old or older," eliminate barriers to non-profit organization's ability to access the credits, and adjust the rules for qualified rehabilitation expenditures in order to make financing smaller rehabilitation projects possible.
We are dedicated to increasing the use of our existing and historic resources. Feel free to contact us at email@example.com if you are considering a ten percent, or 20%, tax credit project.