What are Historic Rehabilitation Tax Credits?
The Historic Tax Credit (HTC) programs (federal and Virginia) are designed to promote the public policy that the preservation of historic community assets is an important part of protecting our shared history. The HTC programs give the private sector an incentive to invest in the rehabilitation and commercial re-use of certified historic buildings. The programs are intended to attract new private capital to fund the rehabilitation of the historic centers of our communities. Many of the historic buildings eligible for the HTC programs are located in low-income communities or designated distressed or underserved areas. The private investors’ funds help revitalize communities through enhanced property values, new jobs, and increased tax revenues from a revitalized tax base.
The HTC programs are complex and bring together architecture, construction, real estate law, and tax law. The benefits to the investors, however, are substantial. They include, at the federal level, tax credits equal to 20% of the qualified renovation expenditures of historic, income-producing buildings. At the state level, the Commonwealth of Virginia provides a tax credit of 25% of the qualified rehabilitation expenditures.
How do you get to the tax credits?
The HTC program is jointly administered by the U.S. Department of the Treasury and the U.S. Department of the Interior (the National Park Service), in partnership with the State Historic Preservation Officer (in Virginia, the Department of Historic Resources).
If the developer’s rehabilitation of a certified historic building meets certain requirements to maintain the historic elements of the structure, then that project can be eligible to seek historic tax credits. Developers of HTC projects use the tax credits to raise equity from private investors to help offset the costs of developing the project. The equity investment helps to finance the historic renovations, reducing the debt burden on the tax credit property.
Investors provide equity in exchange for the tax credits and other benefits over the life of the investment. While the 2017 Tax Act revised some of the rules at the federal level, the tax credits continue to be available beginning the year the project is placed in service. At the state level, the HTC program remains unchanged by the 2017 Tax Act. HTC projects generating only Virginia tax credits are available in certain circumstances where federal credits would not be available.
A combination of tax credits and passive losses reduce the HTC investor’s tax liability, providing the investor with a competitive market rate return. After the 2017 Tax Act, federal credits are often priced more favorably for investors than before.
In addition, some projects will allow bank investors to receive favorable consideration for complying with the Community Reinvestment Act Investment Test.
The project must maintain the historic characteristics approved by the Department of the Interior for a full five-year compliance period. Further, to comply with tax laws at the federal level, the investors must maintain an equity (ownership) position as a limited partner or limited liability company member in an entity that owns the renovated building for the five-year compliance period.
Individual, corporate and banker investors seeking more information on the federal and Virginia HTC programs should contact Neil Birkhoff. Our Tax Group members look forward to the opportunity to help investors preserve history and their income.