With Historic Preservation Tax Credits, Old Buildings Offer Great OpportunityBy Michael W. Hurwitz | May 6, 2020
COVID-19 has everyone I know in the real estate industry rethinking their strategies and altering course. While some investors may be reducing their portfolios, others will see this downturn as an ideal time to acquire properties at a price below their true value. The real winners will be those who consider all aspects of a deal and think creatively about how to maximize the future return of their investment.
Recently, my friend Julio Gonzalez, CEO of Engineered Tax Services, shared a story that reminded me of how smart investors can capitalize on opportunities. Julio took advantage of the Historic Preservation Tax Credit on a building he acquired. He wrote to me, “I can tell you that [the Historic Tax Credit] made the absolute difference in me acquiring a building built in 1903 which, for a century, made shoelaces…when that business eventually went overseas, the building was dormant for many years. Fortunately, it was historic at the federal and state level, and with those tax benefits, I was able to bring back to life an amazing iconic building….which now produces tax revenue for the local city….and houses venture start-ups…pretty remarkable!”
Julio’s strategic investment demonstrates how solid tax law generates a return on investment of tax dollars. I see these kinds of deals becoming more important in the future.
How does the Historic Tax Preservation Credit work?
The Federal Historic Preservation Tax Credit program was created as part of a Reagan Administration economic stimulus package in the early 1980s. It encourages the preservation and reuse of historic buildings for a business or other income-producing purposes. (It is not available for properties used exclusively as the owner’s private residence.) The program uses an indirect federal subsidy to finance the rehabilitation and preservation of certified historic and older buildings with a 20% percent tax credit provided for qualified improvement and rehabilitation expenditures. To qualify, the building must be a certified historic building listed in the National Register of Historic Places or listed as a contributing building in a National Register or state or local historic district certified by the Secretary of the Interior. These agencies work together with the IRS to administer the program. (Learn more about the role each agency plays here.)
Anyone considering this tax credit should be aware that they must complete a three-part Historic Preservation Certification Application, which is intended to help investors satisfy the requirements in order to qualify and successfully obtain the tax credits. From there, the rehabilitation and preservation of the building must be substantial and meet the Secretary of the Interior’s Standards for Rehabilitation, as determined by the National Park Service. There are six requirements to be considered a qualified rehabilitation and preservation expenditure, and all must be met.
Remember, a federal tax credit differs from a federal income tax deduction. An income tax deduction lowers the amount of income subject to taxation. A tax credit, however, lowers the amount of tax ultimately owed. In general, a dollar of tax credit reduces the amount of income tax liability owed by one dollar. Those utilizing the Historic Preservation Tax Credit must hold the preserved building for at least five full years after completing the rehabilitation or pay back the tax credit.
Federal Historic Preservation projects encourage private sector investment in the rehabilitation and re-use of historic buildings. These projects generate jobs, enhance property values, and augment revenues for state and local governments through increased property, business and income taxes. Through this program, abandoned or underused schools, warehouses, factories, churches, retail stores, apartments, hotels, houses, and offices throughout the country have been restored to life in a manner that maintains their historic character. While the process to obtain the Historic Preservation Tax Credit can be complex, and should be discussed with your tax advisor, it can be a strategic way to help produce an income from a historic building!
Additional tax incentives
Most states have similar tax credit incentives and provisions that follow the Historic Preservation Tax Credit program; although often with different percentages (not the 20%). In addition, certain historic buildings listed in the National Register of Historic Places and/or designated as historic properties by local governments may be eligible for an exemption from a portion of local property taxes. Older buildings not listed on the National Register of Historic Buildings can also qualify for tax credits—next week, my colleague Steve Brodsky will share a closer look at rehabilitation credits, one such program that can be another way for savvy investors to plan for future success.
About Michael W. Hurwitz
Michael W. Hurwitz, CPA, MST, is a Partner and REIT Group Leader at Marks Paneth LLP. Mr. Hurwitz brings more than 30 years of experience and a versatile set of skills acquired through working for both public and private companies in the real estate sector. His industry knowledge spans a vast number of areas including real estate tax issues, public and private real estate investment trusts (REITs), opportunity funds, portfolio restructurings, acquisitions and dispositions, partnership... READ MORE +