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Historic Tax Credits

A Guide to Federal and Kentucky Historic Tax Credits


I've always loved Kentucky history. Historic homes have been more of an acquired taste.


That said, I've become fascinated by the connection of people and place, as seen through architecture. You can tell a lot about the way people lived by the way they designed their homes and farms.


Stone home at Shaker Village

Over the last decade, I've volunteered with the Blue Grass Trust for Historic Preservation and I've been on the board of directors for the Kentucky Trust for Historic Preservation. Through my experience, I've gained a working knowledge of historic rehabilitation tax credits that I want to share. I've had this conversation with clients on several occasions, as many of my clients have an interest in history and own historic homes.


Historic tax credits are a fantastic and yet misunderstood option for property owners. The tax credit, which can total 40% or 50% of qualified expenses between state and Federal incentives, can be an incredibly valuable tool to make preservation projects economically viable.


Too often, historic preservation is hard to justify on solely the economic basis of a project. Tax credits provide an added incentive which can make projects economically viable that might not have been otherwise, thereby protecting our cultural heritage.


Historic tax credits can be a confusing topic. Often I find that property owners are intimidated by the red tape and decide that the credits aren’t worth the hassle. The downside to that decision is the potential loss of a credit covering (up to) 40% or 50% of rehabilitation costs. That can be huge!


My goal here is to explain the types of credits available, what properties and expenses qualify for credits, and then break down the process of applying for credits. I’ll also be including links to some helpful resources.


Understanding Federal Historic Tax Credits


Federal historic tax credits are a part of the Historic Preservation Tax Incentives Program, which is administered by the National Park Service (NPS), along with the Internal Revenue Service (IRS). The program is designed to encourage the preservation and rehabilitation of historic buildings that contribute to the cultural and architectural heritage of communities across the US. By offering these tax credits, the federal government is incentivizing property owners to invest in the maintenance and renovation of their historic properties.


These tax credits provide substantial financial incentives specifically for the rehabilitation of historic, income-producing buildings. Eligible properties must be listed on the National Register of Historic Places or be located in a registered historic district. The tax credits cover 20% of the qualified rehabilitation expenses, which significantly reduces the out-of-pocket cost to property owners. This makes restoration economically viable. As a result, historic buildings can be repurposed, which contributes to economic development and urban revitalization. Not to mention, it’s significantly more environmentally friendly to rehabilitate an existing building than to build a new one.


Federal historic tax credits provide more than just financial savings for property owners.  Historic buildings are windows to another time, allowing us to connect with those who came before us. These buildings are often cornerstones of local architecture and typically have played significant roles in their communities. They play a crucial part in maintaining the identity and culture of historic neighborhoods, attracting tourists, and fostering community pride.


The restoration of historic buildings often begins a cycle of increasing property values in historic neighborhoods. When looking at my own community in Louisville, neighborhoods like NuLu and Germantown have become popular in part due to investments driven by historic tax credits.

 

Eligibility Criteria


Before we go any further, I want to explain what type of properties qualify for historic tax credits. You’ll notice that there are separate criteria for state and federal credits. Each entity has different criteria, so it’s important to make sure that you’re eligible for each credit for which you want to apply.


To qualify for Federal historic tax credits, properties must meet specific criteria:


  • Certified Historic Structures: The building must be listed on the National Register of Historic Places or located in a registered historic district and certified as significant to the district's historic nature.

  • Income-Producing Properties: Only buildings used for income-producing purposes, such as commercial, industrial, agricultural, rental residential, or other business-related activities, are eligible.


Additionally, the rehabilitation work must be certified as consistent with the historic character of the property and, where applicable, the district in which it is located. Certification is granted by the Secretary of the Interior through the NPS.


Kentucky Historic Rehabilitation Tax Credit Eligibility Criteria:


  • Properties must be listed in the National Register of Historic Places or located in a National Register district.

  • Properties can be owner-occupied or income-producing. Additionally, properties owned by non-profit organizations are eligible for credits, which they can then transfer or sell.


Types of Tax Credits Available


Federal Rehabilitation Tax Credit:


·       This credit covers 20% of the qualified rehabilitation expenditures for certified historic structures.

·       Qualifying expenses include costs related to the building’s structural and architectural integrity, but exclude acquisition, furnishing, and new construction expenses.


Kentucky Historic Rehabilitation Tax Credit


·       30% of qualified rehabilitation expenditures for owner-occupied properties

·       20% of qualified rehabilitation expenditures for income-producing and non-profit owned properties.


The Application Process


Applying for federal historic tax credits involves a multi-part process:


Part 1: Evaluation of Significance

  • Determine if the property is a certified historic structure. This involves submitting the property for listing in the National Register or verifying its status in a registered historic district.


Part 2: Description of Rehabilitation

  • Provide detailed plans for the proposed rehabilitation, demonstrating how the work will comply with the Secretary of the Interior’s Standards for Rehabilitation. The NPS reviews this part to ensure that the proposed work maintains the building’s historic integrity.


Part 3: Request for Certification of Completed Work

  • After completing the rehabilitation, submit a request for certification to confirm that the work was done as approved. The NPS will review and, if appropriate, certify the completed project.


Required documentation includes various forms from the NPS and IRS, such as the Historic Preservation Certification Application (Parts 1, 2, and 3) and relevant IRS tax forms.

Kentucky utilizes a process similar to the Federal approach, involving a three-part application reviewed by the Kentucky Heritage Council. For detailed instructions, including forms, click here to visit the website of the Kentucky State Historic Preservation Office.


Compliance and Requirements


The rehabilitation must adhere to the Secretary of the Interior’s Standards for Rehabilitation, which emphasize retaining and preserving the building’s historic character and materials. Common compliance issues include inappropriate alterations or additions that compromise the building’s integrity.


It is important that you understand and follow these standards to avoid jeopardizing the tax credit.


Financial and Tax Implications


The tax credits work by allowing property owners to reduce their income tax liability by a percentage of the qualifying rehabilitation expenditures.


With a 20% credit, if you spend $250,000 on qualifying rehabilitation, you could receive a $50,000 tax credit.


Combining federal historic tax credits with other incentives, such as state tax credits and grants, can significantly enhance the financial viability of a project. However, you need to know that there is typically a recapture provision, which may require repayment if the property is sold or ceases to be income-producing within five years.


If you have specific questions on your project, I suggest bringing on a consultant who specializes in historic preservation tax credits. This is a very niche area, and the advice of an experienced professional can make a world of difference. If you need help finding a consultant, I suggest reaching out to your local SHPO for a recommendation.


Benefits Beyond the Tax Credit


Historic rehabilitation projects offer several benefits beyond the immediate financial incentives:


  • Economic Benefits: Projects create jobs, stimulate local economies, and increase property values.

  • Environmental Benefits: Reusing existing buildings conserves resources and reduces the environmental impact associated with new construction.

  • Cultural and Educational Benefits: Preserving historic buildings maintains the community’s cultural heritage and provides educational opportunities.


Resources and Support


Numerous resources are available to help navigate the application process:


Summing it All Up


Federal historic tax credits provide vital support for preserving America’s historic buildings, offering financial incentives that make rehabilitation projects more viable. By understanding the eligibility criteria, application process, and compliance requirements, property owners can successfully navigate the system and reap the benefits of these valuable programs. Combining federal and state credits, such as those available in Kentucky, further enhances these opportunities, contributing to the preservation of our shared heritage for future generations.

 

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