The CRE investors planning to repurpose or rehabilitate the historic buildings can qualify for the historic tax credit. It is a Federal tax study program known for providing the investors with about 20% credit against the rehabilitation cost eligible for landmark structures.
The program has been operating for the last 40 years and is responsible for restoring multiple historic properties. It has to date, acting as a catalyst for over $140 billion of private investment being used for historic rehabilitation projects. But the program is often confused with the state historic tax credit, which is provided by 35 states and has an option to be used against the state income tax liability of the investor.
In the year 1978, the government brought in the Federal Historic Tax program to curb the demolition of historic buildings. The goal was to provide funding to the real estate developers for restoring, renovating, and reconstructing the historic buildings. The historic tax credit, also known as the rehabilitation tax, is a great means for the developers.
No doubt other tax credits will provide as much benefit or incentive to restore and preserve the historic site as the federal historic tax credit. If you are new to this and want to get proper knowledge, then the guide here has provided all the essentials that will be helpful for you to understand things in detail.
Working on historic tax credit program
With the HTC program, the investors have an opportunity to qualify for historic buildings and are granted a 20% tax credit against rehabilitation expenses. However, not all expenses can qualify under the guidelines.
In fact, only the designated qualified rehabilitation expenses are counted. It generally includes the cost of the operation of the maintenance components of the building like
- Lighting fixtures and plumbing
- Floors partitions, walls, etc
- Tiles or permanent coverings
- Elevators, fire escapes, etc
- Doors, stairs, windows, etc
It is vital to know that some of the financing and development-related fees still qualify, like the interest and financing required for construction loans along with engineering construction, management, and developer fees.
Which of the buildings qualify?
To get the historic tax credit program, the eligibility criteria is
- The buildings that are listed as certified historic buildings under the National Register of Historic Places
- The building is certified by the National Park Service as historical.
Rehabilitation rules for the HTC program
The developers who plan to apply for the historic tax credit must remember certain things in order to get approval. The project must be consistent with the Secretary of the Interior Standard of Rehabilitation.
The purpose of the rehabilitation is to guarantee the developer will make as few changes as possible to the building to retain the property’s key historical elements. So essentially, most of the work will be done in a restorative manner.
The eligible properties for the program include multifamily apartments, warehouses, office buildings, and industrial buildings. However, other structures are also eligible. But in the end, to qualify, the properties must have a good chance of generating income or creating jobs in the community. It will help qualify for non-commercial properties like monuments, bridges, roads, etc.
Investing in opportunities zones with HTC
The Tax Cuts and Job Act of 2017 brought in the opportunities zones program, which is one of the most popular Federal tax incentives available for the commercial industry. The program was designated for 8700 qualified zones in low-income areas nominated by the territorial or state governors and is approved by the US Treasury.
With the real estate investment located in these zones, the funds can be utilized well, and investors will have to differ their capital gain taxes for a specific period of time. Considering the HTC program, most of the opportunity zones also overlap significant historical areas meaning there is a great potential for combining the two taxes and terms of maximizing the investment.
In cities like New Orlando, registered historic districts can greatly overlap the opportunities zones in multiple areas. This makes it a prime location for HTC funds to use for development.
Qualifying for Federal historic tax credit
For qualifying for the HTC, the building must be considered historic and listed under the National Register of Historic Places. Besides this, there are certain rules stipulating the building which must undergo substantial rehabilitation.
This means the fund that will be spent for the rehabilitation project must not exceed or be greater either than $5000 or the adjusted basis, which is the purchase price minus the cost of the land and other improvements made minus depreciation.
The improvement to the property, which is not actually associated with the historic building itself, does not qualify for any part of the substantial rehabilitation. For instance, the improvement to the landscaping and parking area can’t be calculated into the substantial rehabilitation when making use of historic tax credit for restoring the building.
There are certain criteria that are to be considered. It will often include repurposing the building into community assets like educational facilities, apartments, museums, hotels, and theatres. There are different other stipulations that can also qualify for the HTC.
This includes.
- The improvement that is to be made to the historical buildings must be completed within two years. If the renovation is completed in the preapproval phase, then the timeline will jump to 60 months.
- The renovation that is proposed for the historical building must comply with the Security of the Interior Standard of Rehabilitation.
- The building considered for renovation must be seen as income-generating property used for residential or commercial purposes. Herein the private residence that the owner uses does not qualify.
Changes made to the HTC.
The HTC met its demise in the year 2017 after the recent tax overhaul. The rules since then have changed, as stated in public law 150-97. Under the new legislation, it is noted that 20% of the credit must be divided equally over the year five years, beginning when the building is placed for the service.
This means 4% will be provided each for the five years for covering at 20% credit. Before this, the entire 20% credit was available just as soon as the building was ready for occupancy. The new law has brought in a lot of changes.
It has also axed the historic tax credit system, which presented a 10% tax credit for renovations on any building that was constructed before 1936. But with that has been gone, the year doesn’t matter—only the inclusion on the National Register of Historic Places matters. For making use of any such investment option, it is vital to get a proper understanding of it all.
Having professional support of private commercial real estate lenders herein will make a great difference and guarantee you are able to make the most of the available opportunities and get positive outcomes. Right from understanding the needs of the loan to getting all the documentation ready, you need to take care of it all right in advance so that process goes smoothly and you get the funding.
Make sure you fill out the application in the right manner and double-check it to avoid any complications.
Application for HTC
The application one has to fill out to qualify for the HTC is broken into three steps.
- phase 1 is used for presenting information about the building’s appearance and historical significance. This will include interior and exterior pictures as well as the maps.
- Part 2 of the application is meant for the current condition of the building description and the intended purpose of the restoration.
- Part 3 is to be submitted after the project is well completed. The step will involve inspection by the Secretary of the interior staff to ensure the construction was completed according to the standard for rehabilitation.
It is required to send two copies of the complete application to the State Historic Preservation Office or whichever state the rehabilitation project is to be carried out. The office will review the application within 30 days.
If it is approved, then they will send a second copy to the National Park Service, which will also review the application within the period of 30 days. This will make it a total of 60 days process; until then, the developer has to wait to get the results.
Conclusion
The HTC is one of the biggest measures which was brought into the industry. The developers are now making use of it for restoring the historical projects and earning certain benefits. However, the process can be quite complicated, especially for those who are new in the industry.
So to get professional assistance, it is vital that you consider contacting a good company that has been operating for years. Private Capital Investors is the one you can rely on. They have got the professional stated income commercial lenders who will stay by your side and guarantee to provide you with the professional assistance you need to make a good investment in the industry.
The experts have got proper understanding. They will know how to help you out in every situation and assure you the best. To connect with them to know about the available options.
