The Basics: Historic Tax Credits
Meyer Group Architecture recently has participated in several projects utilizing historic tax credits as a financing mechanism. As the Duluth Metro Area has a rich stock of historic structures, we wanted to share this primer on the background of Federal and State of Minnesota Historic Tax Credits. We feel this is useful information to building owners in our community who maybe able to utilize this important information as a financing mechanism in updated their historic properties in the region. Feel free to contact us with any need for information.
The Basics: Historic Tax Credits
Adding value to communities by preserving our country’s architectural heritage and revitalizing economic activity.
The federal Historic Tax Credit (HTC) program was enacted in 1976 to encourage the preservation and rehabilitation of historically significant buildings. Our investments in the HTC program help to restore our nation’s architectural heritage and bring new residential and commercial activity into these communities.
Historic Tax Credit Overview
Administered by the National Park Service and the Internal Revenue Services in partnership with State Historic Preservation Offices, the HTC program is the nation’s most effective program to promote historic preservation and community revitalization through historic rehabilitation. HTCs provide funding for developers that rehabilitate certified historic landmarks and buildings into income-generating properties that create jobs and promote economic revitalization. These properties are typically used for:
- Commercial offices and retail properties
- Mixed-use (commercial/residential) properties
- Factories and industrial facilities
- Agricultural facilities
- Community centers
- Educational facilities
- Entertainment/cultural facilities
- Hotels and hospitality properties
Current federal tax incentives for historic preservation were established by the Tax Reform Act of 1986 and include:
- A 20 percent tax credit of Qualified Rehabilitation Expenditures (QREs) for the cost incurred during the rehabilitation of a certified historic structure for commercial, agricultural, industrial or residential rental purposes.
- A 10 percent tax credit of QREs for the costs incurred during the rehabilitation of an older, non-residential building built before 1936 that is not yet listed as a certified historic structure.
Congress sometimes increases eligible basis for limited periods to provide additional subsidy for the rehabilitation of buildings in areas affected by natural disasters. In addition, many states provide state tax incentives for historic preservation.
HTCs are claimed at the time the property (the building or significant portions of the building) becomes operational.
HTC Qualification Criteria
The development property must be a certified historic structure, which can include:
- A certified historic building listed in the National Register of Historic Places, which is the official list of the nation’s districts, sites, buildings, structures and objects significant in American history, architecture, archeology, engineering and culture
- A building located in a registered historic district and certified by the National Park Service as contributing to the historic significance of that district
- An older, non-residential building built before 1936 that is not yet listed as a certified historic structure
In all cases, the building must be depreciable as a residential or commercial taxable income producing property, and rehabilitation must be substantial. Other requirements include:
- During a 24-month period selected by the project sponsor (or a 60-month period, if the development is “phased”) rehabilitation expenditures must exceed the greater of $5,000 or the owner’s adjusted basis of the building and its structural improvements. The adjusted basis is generally the purchase price minus the cost of land, plus improvements already made, minus depreciation already taken.
- While the building may be used for rental housing, it may not serve exclusively as the owner’s private residence.
Bridges, ships, railroad cars, dams and monuments are not eligible under the HTC program.
Minnesota State Historic Tax Credits:
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