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What are historic tax credits, and why are they important to real estate development and investment?

Historic Building

As a real estate investor, you’ve probably heard the term “historic tax credits” mentioned in conversation or in articles where it was assumed that everyone knew what they were and how they work. If you haven’t dealt with them directly, you may need a primer on what historic tax credits are all about.

Historic tax credits award federal income tax credits equal to a certain percentage of “qualified rehabilitation expenses.” The developer of the project can keep and use the credit, but it is usually sold to an entity or individual known as a tax credit investor. Receiving a tax credit that can be sold is comparable to being given free capital for a project.

Historic tax credits, also known as HTCs, have made many historic redevelopments possible since the early 1980s. Without them, these projects likely would have never been completed because they would have been economically infeasible due to their low return on investment.

Federal historic tax credits come in two forms: a 20% credit for income-producing, certified historic structures and a 10% credit for non-historic structures placed in service before 1936. For a building to be considered a certified historic structure, it must be listed on the Federal Registry of Historic Places, which is maintained by the National Park Service. The National Park Service administers the federal historic tax credit program, with assistance from state historic preservation offices. The states also often offer credits of their own that can be acquired alongside the federal credits.

The recent Tax Cuts and Jobs Act made several changes to the HTC program. The House version of the bill completely eliminated the federal historic tax credit; fortunately, the Senate version that was signed into law retained the program, subject to some modifications. The bill retains and modifies the 20% credit for rehabilitation expenditures for certified historic structures. The entire credit used to be awarded in the year in which the rehabilitated building is placed into service; now 20% of the credit is received each year for five years after the building is placed into service. The bill eliminated the 10% credit for non-historic buildings.

Corporate investors may now be less interested in buying historic tax credits, since the corporate tax rate was lowered and the credit is allocated over five years, instead of all at once. Nevertheless, the program is so popular and has helped save so many historic structures that “but for” the availability of these credits would never have been redeveloped.

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