Table Of Content

Tax Preservation Incentives for Historic Buildings i at 00 U.S.DepartmentoftheInterior NationalParkService CulturalResources HeritagePreservationServices I 1 hisbookletdescribes the Federal Historic Preserva- tionTax Incentivesprogram in general termsonly. For more detailed information, inclndingcopiesofappli- cation forms, regnlations, and otherprogram information, contactone ofthe officeslisted on pages 25-28. The Tax ReformActof1986, asamended, is complex. Readersshould consultan accountant, taxattorney, or otherprofessional taxadvisor, legal counsel, orthe In- ternal Revenue Service forhelp in determiningthe tax and otherfinancial implicationsofanymatterdis- cussed here. Departmentofthe Interiorregulationsgoverningthe proceduresforobtaininghistoric preservation certifi- cationsare more fullyexplained in Title 36ofthe Code ofFederal Regulations, Part67. The Internal Revenue Service regulationsgoverning the taxcredits forrehabilitation are contained inTreasuryRegula- tion Section 1.48-12. These setsofregulations take precedence in the eventofanyinconsistencywith this booklet. Prepared byMichael Auer J. Heritage Preservation Services National ParkService 1996 Coverphoto: TheBrentwood, Philadelphia, Pennsylvania (1905). Afterundergoingrehabilitationfor43units of affordablehousing. Courtesy BrentwoodParksideAssoci- ates, ajointventureofPennroseProperties, Inc. and the ParksideHistoricPreservation Corporation. © 1996Don RousePhotographer. Table ofContents PreservationTaxIncentives 2 WhatIsaTaxCredit? 3 20% RehabilitationTaxCredit 4 RehabilitationTaxCredits:Who DoesWhat? 12 10% RehabilitationTaxCredit 14 The 10% or20% Credit: Which OneApplies? 15 OtherTax ProvisionsAffectingUse of PreservationTaxIncentives 16 RehabilitationsInvolvingGovernmentsand OtherTax-ExemptEntities 18 OtherTaxIncentivesforHistoric Preservation .... 19 The Secretaryofthe Interior's Standards forEvaluatingSignificance Within Registered Historic Districts 21 The Secretaryofthe Interior'sStandards forRehabilitation 22 ForMore Information 24 NationalParkService, Internal Revenue Service and State Historic Preservation Officers 25 UNIVERSITY OP GEORGIA NOV &5 1996 LIBRARIES DEPOSITORY 2 PreservationTax Incentives Historic buildingsare tangible linkswith the past. Theyhelp give acommunityasense ofidentity, stabilityand orientation. The Federal government encourages the preservation ofhistoric buildings throughvariousmeans. One ofthese is the program ofFederal taxincentives to supportthe rehabilitation ofhistoric and olderbuildings. The Federal Historic Preservation TaxIncentivesprogram isone ofthe Federal government's mostsuccessful andcost- effective communityrevitalization programs. The PreservationTaxIncentivesrewardprivate investment in rehabilitatinghistoric properties such asoffices, rental housing, and retail stores. Since 1976, the National ParkService has administered the program in partnershipwith the Internal Revenue Service andwith State Historic Preservation Officers. The tax incentiveshave spurred the rehabilitation ofhistoric structuresofevery period, size, style and type. Theyhave been instrumental in preservingthe historic places thatgive cities, townsand rural areas theirspecial character. The taxincentivesforpreservation attractnewprivate investmentto the historic coresofcitiesand towns. Theyalso generatejobs, enhance propertyvalues, and augmentrevenuesforState and localgovernments through increased property, businessandincome taxes. The PreservationTaxIncentivesalso help create moderate and low-income housingin historic buildings. Through thisprogram, abandonedor underusedschools,warehouses, factories, churches, retailstores, apartments, hotels, houses, andoffices throughout the countryhave been restored to lifeina M3*fma,n/ne*•'r't;hat*m9aViInHtUai.ns t,hei.r,hi.stori.c,character. • ) Currenttaxincentivesforpreservation, establishedby theTax ReformActof1986 (PL99-514; Internal Revenue Code Section 47 [formerlySection 48(g)] include: a20% taxcreditforthe certifiedrehabilitation of certifiedhistoricstructures. a 10% taxcreditforthe rehabilitation ofnon- historic, non-residentialbuildingsbuiltbefore 1936. Forboth credits, the rehabilitation mustbe a substantialone andmustinvolve a depreciablebuilding. (These termswill be explained later.) What Is aTax Credit? Ataxcreditdiffersfrom an income tax deduction.An income taxdeduction lowers the amountofincome A subjectto taxation. taxcredit, however, lowers the amountoftaxowed. Ingeneral, adollaroftaxcredit reduces the amountofincome tax owedbyone dollar. The 20% rehabilitation tax creditequals 20% ofthe amountspentin a certifiedrehabilitationofa certified historicstructure. The 10% rehabilitation taxcreditequals 10% ofthe amountspentto rehabilitate a non-historicbuilding builtbefore 1936. \mon Clarence Thomas House, NewHarmony, rndiana (1899). Courtesy Z. ScottMcDonald. 20% RehabilitationTax Credit The Federal historic preservation taxincentives program (the 20% credit) isjointlyadministeredby the U.S. Departmentofthe Interiorand the DepartmentoftheTreasury. The National Park Service (NPS) actson behalfofthe Secretaryofthe Interior, in partnershipwith the State Historic Preservation Officer (SHPO) in each State. The Internal Revenue Service (IRS) actson behalfofthe SecretaryoftheTreasury. Certification requests (requestsforapprovalfora taxpayerto receive these benefits) are made to the National ParkService through the appropriate State Historic Preservation Officer (SHPO). Commentsbythe SHPO on certification requestsarefullyconsideredbythe NPS. However, approval ofprojectsundertaken for the 20% taxcreditisconveyed only in writinghydulyauthorized officialsofthe National Park Service. Fora description ofthe rolesofthe NPS, the IRS and the SHPO, see "Tax Credits: Who DoesWhat?"on pages 12-13. The 20% rehabilitation taxcreditapplies to any project thatthe Secretaryofthe Interiordesignatesa certifiedrehabilitationofa certifiedhistoricstructure. The 20% creditisavailable forpropertiesrehabilitated for commercial, industrial, agricultural, orrental residential purposes, butitisnotavailable for propertiesused exclusivelyas the owner'sprivate residence. 431 UnionAvenue, SE, GrandRapids, Michigan (ca. 1880). Afterreha- bilitationforcontin- ued residentialuse. CourtesyDonald Smalligan. What is a"certified historic structure?" A certifiedhistoricstructureisabuilding thatislisted individuallyin the National RegisterofHistoric Places — — OR abuilding thatislocatedin a registeredhistoric districtand certifiedbythe National ParkService as contributingto the historic significance ofthat — district. The "structure"mustbe abuilding nota bridge, ship, railroadcar, ordam. (A registeredhistoric districtisanydistrictlisted in the National Registerof Historic Places.AState orlocal historic districtmay also qualifyasa registeredhistoricdistrictifthe district and the enablingstatute are certified bythe Secretary ofthe Interior.) Obtaining Certified Historic StructureStatus Ownersofbuildingswithin historic districtsmust complete Part 1 ofthe Historic Preservation — CertificationApplication Evaluation ofSignificance. The ownersubmits this application to the SHPO. The SHPO reviews the application and forwardsitto the NPSwith arecommendation forapprovingordenying therequest. The NPS then determineswhetherthe buildingcontributes to the historic district. Ifso, the building then becomesa "certified historic structure." The NPSbasesitsdecision on the Secretaryofthe Interior's "StandardsforEvaluatingSignificance within RegisteredHistoric Districts,"which appearon page 21. Buildingsindividuallylistedin the NationalRegister ofHistoric Placesare alreadycertified historic structures. Ownersofthesebuildingsneed not complete the Part 1 application. Propertyownersunsure iftheirbuildingislisted in the National Registerorifitislocatedin aNational Registerorcertified State orlocal historic district shouldcontacttheirSHPO. What ifmybuilding is notyetlisted inthe NationalRegister? Owners ofbuildings thatare notyetlisted individually in the National RegisterofHistoric Placesorlocated in districts thatare notyetregistered historic districts mayuse the Historic Preservation Certification Application, Part 1, to requestapreliminary determination ofsignificancefrom, the National Park Service. Such a determination mayalsobe obtained forabuildinglocated in aregistered historic district butthatisoutside the period orareaofsignificance of the district. Apreliminarydetermination of significance allows the ownerto proceedwith the rehabilitation projectwhile the processofnominating abuildingoradistrictcontinues. Preliminary determinations, however, are notbinding. They become final onlywhen the buildingor the historic districtislisted in the National Registerorwhen the district documentation isamended to include additional periodsofareasofsignificance. What is a"certified rehabilitation?" The National ParkService mustapprove, or "certify," all rehabilitation projects seeking the 20% A rehabilitation taxcredit. certifiedrehabilitationisa rehabilitation ofa certifiedhistoricstructurethatis approved bythe NPS asbeingconsistentwith the historic characterofthe propertyand,where applicable, the districtinwhich itislocated. The NPS assumes thatsome alteration ofthe historic building will occurto provide foran efficientuse. However, the projectmustnotdamage, destroy, orcovermaterials orfeatures, whetherinteriororexterior, thathelp define the building'shistoric character. ApplicationProcess Ownersseekingcertification ofrehabilitationwork mustcomplete Part2 ofthe Historic Preservation — CertificationApplication Description of Rehabilitation. Long-term lesseesmayalso applyif theirlease is 27.5yearsforresidential propertyor39 yearsfornonresidential property. The ownersubmits the application to the SHPO. The SHPO provides technical assistance and literature on appropriate rehabilitation treatments, advisesownerson their applications, makessitevisitswhen possible, and forwards the application to the NPS,with a recommendation. The NPSreviews the rehabilitation projectfor conformancewith the "Secretaryofthe Interior's StandardsforRehabilitation,"and issuesa certification decision. The entire projectisreviewed, includingrelateddemolition and newconstruction, and iscertified, orapproved, onlyifthe overall rehabilitation projectmeets the Standards. These Standardsappearon pages 22-23. Both the NPSand the IRS stronglyencourage owners to apply beforethey startwork. Afterthe rehabilitationworkiscompleted, the owner submitsPart3 ofthe Historic Preservation — CertificationApplication RequestforCertification of CompletedWorkto the SHPO. The SHPOforwards the application to the NPS,with arecommendation as to certification. TheNPS then evaluatesthe completedprojectagainst theworkproposedin the — Part2 Description ofRehabilitation. Only completed projects thatmeetthe Standardsfor Rehabilitation are approvedas "certified rehabilitations"forpurposesofthe 20% rehabilitation taxcredit. ProcessingFees The NPSchargesafee forreviewingapplications, exceptwhere the total rehabilitation costisunder $20,000. Fees are chargedaccording to a two-tiered system: apreliminaryfee and afinal fee. The preliminaryfee is$250. ItcoversNPS reviewof proposedrehabilitationwork. The finalfee coversNPS reviewofcompletedprojects. The finalfee amount depends on the costofthe rehabilitation, accordingto the fee schedule below. The preliminaryfee is deductedfrom the final fee. Paymentshould notbe sentuntil requestedbythe NPS. The NPSwill notissue acertification decision until paymenthasbeen received. Fee CostofRehabilitation $500 $20,000 to $99,999 $800 $100,000 to$499,999 $1,500 $500,000 to$999,999 $2,500 $1,000,000 ormore IRS Requirements To be eligiblefor the 20% rehabilitation taxcredit, a projectmustalso meetthe followingbasic tax requirementsofthe Internal Revenue Code: The building mustbe depreciable. Thatis, itmustbe used in a trade orbusinessorheldforthe production ofincome. Itmaybe usedforoffices, for commercial, industrialoragriculturalenterprises, or forrental housing. Itmaynotserve exclusivelyas the owner'sprivate residence. The rehabilitation mustbe substantial. Thatis, duringa24-month periodselectedbythe taxpayer, rehabilitation expenditures mustexceed thegreater of$5,000 or the adjustedbasisofthe buildingandits structuralcomponents. The adjustedbasis is generallythe purchase price, minusthe costofland, plusimprovements alreadymade, minus depreciation alreadytaken. Once the substantial rehabilitation testismet, all qualified expenditures,