Historic buildings are tangible links with the past. They help give a community a sense of identity, stability and orientation. The Federal government encourages the preservation of historic buildings through various means. One of these is the program of Federal tax incentives to support the rehabilitation of historic and older buildings.

• Introduction
• Preservation Tax Incentives
• What is a Tax Credit?
• 20% Rehabilitation Tax Credit
• Rehabilitation Tax Credits: Who Does What?
• 10% Rehabilitation Tax Credit
• The 10% or the 20% Credit: Which One Applies?
• Other Tax Provisions Affecting Use of Preservation Tax Incentives
• Rehabilitations Involving Governments and Other Tax-Exempt Entities
• Other Tax Incentives for Historic Preservation
• The Secretary of the Interior's Standards for Evaluating Significance Within Registered Historic Districts
• The Secretary of the Interior's Standards for Rehabilitation
• For More Information
• Contact the Historic Preservation Tax Incentives Program Partners

The Federal Historic Preservation Tax Incentives program is described here in general terms only. For more detailed information, including copies of application forms, regulations, and other program information, contact the State Historic Preservation Office for the state in which the project is located. Every effort has been made to present current information. However, the Internal Revenue Code is complex and changes frequently. Furthermore, the provisions of the tax code regarding at-risk rules, passive activity limitation, and alternative minimum tax can affect a taxpayer's ability to use these tax credits. Applicants are strongly advised to consult an accountant, tax attorney, or other professional tax advisor, legal counsel, or the Internal Revenue Service for help in determining whether these incentives pertain to their own situations.

Department of the Interior regulations governing the procedures for obtaining historic preservation certifications are more fully explained in Title 36 of the Code of Federal Regulations, Part 67. The Internal Revenue Service regulations governing the tax credits for rehabilitation are contained in Treasury Regulation Section 1.48-12. These sets of regulations take precedence in the event of any inconsistency with this publication.

Historic buildings are tangible links with the past. They help give a community a sense of identity, stability and orientation. The Federal government encourages the preservation of historic buildings through various means. One of these is the program of Federal tax incentives to support the rehabilitation of historic and older buildings. The Federal Historic Preservation Tax Incentives program is one of the Federal government's most successful and cost-effective community revitalization programs. The Preservation Tax Incentives reward private investment in rehabilitating historic properties such as offices, rental housing, and retail stores.

Since 1976, the National Park Service has administered the program in partnership with the Internal Revenue Service and with State Historic Preservation Officers. The tax incentives have spurred the rehabilitation of historic structures of every period, size, style and type. They have been instrumental in preserving the historic places that give cities, towns and rural areas their special character. The tax incentives for preservation attract new private investment to the historic cores of cities and towns. They also generate jobs, enhance property values, and augment revenues for State and local governments through increased property, business and income taxes. The Preservation Tax Incentives also help create moderate and low-income housing in historic buildings. Through this program, abandoned or under used 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. Current tax incentives for preservation, established by the Tax Reform Act of 1986 (PL 99-514; Internal Revenue Code Section 47 [formerly Section 48(g)]) include:

• 20% tax credit for the certified rehabilitation of certified historic structures.


• a 10% tax credit for the rehabilitation of non-historic, non-residential buildings built before 1936.

For both credits, the rehabilitation must be a substantial one and must involve a depreciable building. (These terms will be explained later.)

A tax credit differs from an income tax deduction. An income tax deduction lowers the amount of income subject to taxation. A tax credit, however, lowers the amount of tax owed. In general, a dollar of tax credit reduces the amount of income tax owed by one dollar.

• The 20% rehabilitation tax credit equals 20% of the amount spent in a certified rehabilitation of a certified historic structure.


• The 10% rehabilitation tax credit equals 10% of the amount spent to rehabilitate a non-historic building built before 1936.

The Federal historic preservation tax incentives program (the 20% credit) is jointly administered by the U.S. Department of the Interior and the Department of the Treasury. The National Park Service (NPS) acts on behalf of the Secretary of the Interior, in partnership with the State Historic Preservation Officer (SHPO) in each State. The Internal Revenue Service (IRS) acts on behalf of the Secretary of the Treasury. Certification requests (requests for approval for a taxpayer to receive these benefits) are made to the National Park Service through the appropriate State Historic Preservation Officer (SHPO). Comments by the SHPO on certification requests are fully considered by the NPS. However, approval of projects undertaken for the 20% tax credit is conveyed only in writing by duly authorized officials of the National Park Service. For a description of the roles of the NPS, the IRS and the SHPO, see Tax Credits: Who Does What?

The 20% rehabilitation tax credit applies to any project that the Secretary of the Interior designates a certified rehabilitation of a certified historic structure. The 20% credit is available for properties rehabilitated for commercial, industrial, agricultural, or rental residential purposes, but it is not available for properties used exclusively as the owner's private residence.

A certified historic structure is a building that is listed individually in the National Register of Historic Places -OR- a building that is located in a registered historic district and certified by the National Park Service as contributing to the historic significance of that district. The "structure" must be a building-not a bridge, ship, railroad car, or dam. (A registered historic district is any district listed in the National Register of Historic Places. A State or local historic district may also qualify as a registered historic district if the district and the enabling statute are certified by the Secretary of the Interior.)

Obtaining Certified Historic Structure Status

Owners of buildings within historic districts must complete Part 1 of the Historic Preservation Certification Application - Evaluation of Significance. The owner submits this application to the SHPO. The SHPO reviews the application and forwards it to the NPS with a recommendation for approving or denying the request. The NPS then determines whether the building contributes to the historic district. If so, the building then becomes a "certified historic structure." The NPS bases its decision on the Secretary of the Interior's Standards for Evaluating Significance within Registered Historic Districts.

Buildings individually listed in the National Register of Historic Places are already certified historic structures. Owners of these buildings need not complete the Part 1 application (unless the listed property has more than one building).

Property owners unsure if their building is listed in the National Register or if it is located in a National Register or certified State or local historic district should contact their SHPO.

What if my building is not yet listed in the National Register?

Owners of buildings that are not yet listed individually in the National Register of Historic Places or located in districts that are not yet registered historic districts may use the Historic Preservation Certification Application, Part 1, to request a preliminary determination of significance from the National Park Service. Such a determination may also be obtained for a building located in a registered historic district but that is outside the period or area of significance of the district. A preliminary determination of significance allows the owner to proceed with the rehabilitation project while the process of nominating a building or a district continues. Preliminary determinations, however, are not binding. They become final only when the building or the historic district is listed in the National Register or when the district documentation is amended to include additional periods of areas of significance.

The NPS charges a fee for reviewing applications, except where the total rehabilitation cost is under $20,000. Fees are charged according to a two-tiered system: a preliminary fee and a final fee. The $250 preliminary fee covers NPS review of proposed work. The final fee covers NPS review of completed projects. The final fee depends on the rehabilitation costs, according to the fee schedule below. The preliminary fee is deducted from the final fee. Payment should not be sent until requested by NPS. The NPS will not issue a certification decision until payment has been received.

To be eligible for the 20% rehabilitation tax credit, a project must also meet the following basic tax requirements of the Internal Revenue Code:

• The building must be depreciable. That is, it must be used in a trade or business or held for the production of income. It may be used for offices, for commercial, industrial or agricultural enterprises, or for rental housing. It may not serve exclusively as the owner's private residence.


• The rehabilitation must be substantial. That is, during a 24-month period selected by the taxpayer, rehabilitation expenditures must exceed the greater of $5,000 or the adjusted basis of the building and its structural components. The adjusted basis is generally the purchase price, minus the cost of land, plus improvements already made, minus depreciation already taken. Once the substantial rehabilitation test is met, all qualified expenditures, including those incurred outside of the measuring period, qualify for the credit.


• For phased rehabilitations, the same rules apply, except that a 60-month measuring period applies. This phase rule is available only if: (1) a set of architectural plans and specifications outlines and describes all rehabilitation phases; (2) the plans are completed before the physical rehabilitation work begins, and (3) it can reasonably be expected that all phases will be completed.


• The property must be placed in service (that is, returned to use). The rehabilitation tax credit is generally allowed in the taxable year the rehabilitated property is placed in service.


• The building must be a certified historic structure when placed in service; if it is not yet a certified historic structure when placed in service, the owner must have requested on or before the date that the building was placed in service a determination from the NPS that the building is a certified historic structure, and have a reasonable expectation that the determination will be granted.


• Qualified rehabilitation expenditures include costs of the work on the historic building, as well as architectural and engineering fees, site survey fees, legal expenses, development fees, and other construction-related costs, if such costs are added to the property's basis and are determined to be reasonable and related to the services performed. They do not include costs of acquiring or furnishing the building, new additions that expand the existing building, new building construction, or parking lots, sidewalks, landscaping, or other related facilities.

Tens of thousands of projects have been approved for the historic preservation tax credit. Observing the following points will make approval of your project easier:

• Apply as soon as possible-preferably before beginning work. Consult with the SHPO as soon as you can. Read carefully the program application, regulations, and any other information the SHPO supplies. Submit your application early in the project planning. Wait until the project is approved in writing by the NPS before beginning work. Work undertaken prior to approval by the NPS may jeopardize certification. In the case of properties not yet designated certified historic structures, apply before the work is completed and the building placed in service.


• Photograph the building inside and outside-before and after the project. "Before" photographs are especially important. Without them, it may be impossible for the NPS to approve a project.


• Read and follow the "Secretary of the Interior's Standards for Rehabilitation" and the "Guidelines for Rehabilitating Historic Buildings." If you are unsure how they apply to your building, consult with the SHPO or the NPS.


• Once you have applied, alert the SHPO and the NPS to any changes in the project.

Generally, the tax credit is claimed on IRS form 3468 for the tax year in which the rehabilitated building is placed in service. For phased projects, the tax credit may be claimed before completion of the entire project provided that the substantial rehabilitation test has been met. If a building remains in service throughout the rehabilitation, then the credit may be claimed when the substantial rehabilitation test has been met. Unused tax credit can be "carried back" one year and "carried forward" 20 years.

The IRS requires that the NPS certification of completed work (Application Part 3) be filed with the tax return claiming the tax credit. If final certification has not yet been received when the taxpayer files the tax return claiming the credit, a copy of the first page of the Historic Preservation Certification Application-Part 2 must be filed with the tax return. The copy of the application filed must show evidence that it has been received by either the SHPO or the NPS (date-stamped receipt or other notice is sufficient). If the taxpayer then fails to receive final certification within 30 months after claiming the credit, the taxpayer must agree to extend the period of assessment. If the NPS denies certification to a rehabilitation project, the credit will be disallowed.

Recapture of the Credit

The owner must hold the building for five full years after completing the rehabilitation, or pay back the credit. If the owner disposes of the building within a year after it is placed in service, 100% of the credit is recaptured. For properties held between one and five years, the tax credit recapture amount is reduced by 20% per year.

The NPS or the SHPO may inspect a rehabilitated property at any time during the five-year period. The NPS may revoke certification if work was not done as described in the Historic Preservation Certification Application, or if unapproved alterations were made for up to five years after certification of the rehabilitation. The NPS will notify the IRS of such revocations.

Depreciation

Rehabilitated property is depreciated using the straight-line method over 27.5 years for residential property and over 39 years for nonresidential property. The depreciable basis of the rehabilitated building must be reduced by the full amount of the tax credit claimed.

The Federal historic preservation tax incentives program is a partnership among the National Park Service (NPS), the State Historic Preservation Officer (SHPO), and the Internal Revenue Service (IRS). Each plays an important role.

• Serves as first point of contact for property owners.


• Provides application forms, regulations, and other program information.


• Maintains complete records of the State's buildings and districts listed in the National Register of Historic Places, as well as State and local districts that may qualify as registered historic districts.


• Assists anyone wishing to list a building or a district in the National Register of Historic Places.


• Provides technical assistance and literature on appropriate rehabilitation treatments.


• Advises owners on their applications and makes site visits on occasion to assist owners.


• Makes certification recommendations to the NPS.

• Reviews all applications for conformance to the Secretary of the Interior's Standards for Rehabilitation.


• Issues all certification decisions (approvals or denials) in writing.


• Transmits copies of all decisions to the IRS.


• Develops and publishes program regulations, the Secretary of the Interior's Standards for Rehabilitation, the Historic Preservation Certification Application, and information on rehabilitation treatments.

• Publishes regulations governing which rehabilitation expenses qualify, the time periods for incurring expenses, the tax consequences of certification decisions by NPS, and all other procedural and legal matters concerning both the 20% and the 10% rehabilitation tax credits.


• Answers public inquiries concerning legal and financial aspects of the Rehabilitation Tax Credit program, and publishes the audit guide, Market Segment Specialization Program: Rehabilitation Tax Credit, to assist owners.


• Insures that only parties eligible for the rehabilitation tax credits utilize them.

The 10% rehabilitation tax credit is available for the rehabilitation of non-historic buildings placed in service before 1936.

As with the 20% rehabilitation tax credit, the 10% credit applies only to buildings-not to ships, bridges or other structures. The rehabilitation must be substantial, exceeding either $5,000 or the adjusted basis of the property, whichever is greater. And the property must be depreciable.

The 10% credit applies only to buildings rehabilitated for non-residential uses. Rental housing would thus not qualify. Hotels, however, would qualify. They are considered to be in commercial use, not residential.

A building was moved after 1935 is ineligible for the 10% rehabilitation credit. (A moved certified historic structure, however, can still be eligible for the 20% credit.) Furthermore, projects undertaken for the 10% credit must meet a specific physical test for retention of external walls and internal structural framework:

• at least 50% of the building's external walls existing at the time the rehabilitation began must remain in place as external walls at the work's conclusion, and


• at least 75% of the building's existing external walls must remain in place as either external or internal walls, and


• at least 75% of the building's internal structural framework must remain in place.

The tax credit must be claimed on IRS form 3468 for the tax year in which the rehabilitated building is placed in service. There is no formal review process for rehabilitations of non-historic buildings.

The 10% rehabilitation tax credit applies only to non-historic buildings first placed in service before 1936 and rehabilitated for non-residential uses. The 20% rehabilitation tax credit applies only to certified historic structures, and may include buildings built after 1936. The two credits are mutually exclusive. Which credit applies depends on the building-not on the owner's preference.

Buildings listed in the National Register of Historic Places are not eligible for the 10% credit. Buildings located in National Register listed historic districts or certified State or local historic districts are presumed to be historic and are therefore not eligible for the 10% credit. Owners of buildings in these historic districts may claim the 10% credit only if they file Part 1 of the Historic Preservation Certification Application with the National Park Service and receive a determination that the building does not contribute to the district and is not a certified historic structure.

A number of provisions in the Internal Revenue Code affect the way in which real estate investments are treated generally. These provisions include the "at-risk" rules, the passive activity limitation, and the alternative minimum tax. What these provisions mean, in practice, is that many taxpayers may not be able to use tax credits earned in a certified rehabilitation project.

A brief discussion of these matters follows. Applicants should seek professional advice concerning the personal financial implications of these provisions.

Under Internal Revenue Code Section 465, a taxpayer may deduct losses and obtain credits from a real estate investment only to the extent that the taxpayer is "at-risk" for the investment. The amount that a taxpayer is "at-risk" is generally the sum of cash or property contributions to the project plus any borrowed money for which the taxpayer is personally liable, including certain borrowed amounts secured by the property used in the project. In addition, in the case of the activity of holding real property, the amount "at-risk" includes qualified non-recourse financing borrowed from certain financial institutions or government entities.

The passive activity limitation provides that losses and credits from "passive" income sources, such as real estate limited partnerships, cannot be used to offset tax liability from "active" sources such as salaries. This passive activity limitation does not apply to:

• Most regular corporations.


• Real estate professionals who materially participate in a real property trade or business and who satisfy eligibility requirements regarding the proportion and amount of time spent in such businesses.

For other taxpayers, two exceptions apply: a general exception and a specific exception for certified rehabilitations.

Taxpayers with incomes less than $100,000 (generally, adjusted gross income with certain modifications) may take up to $25,000 in losses annually from rental properties. This $25,000 annual limit on losses is reduced for individuals with incomes between $100,000 and $150,000 and eliminated for individuals with incomes over $150,000.

Individuals, including limited partners, with modified adjusted gross incomes of less than $200,000 (and, subject to phase out, up to $250,000) investing in a rehabilitation credit project may use the tax credit to offset the tax owed on up to $25,000 of income. Thus, a taxpayer in the 33% tax bracket could use $8,250 of tax credits per year (33% x $25,000 = $8,250).

This $25,000 amount is first reduced by losses allowed under the general "passive loss" rule above for taxpayers with incomes less than $150,000.

Taxpayers who are not required to pay tax under the regular tax system may still be liable for tax under the alternative minimum tax laws. Alternative minimum taxable income is computed from regular taxable income with certain adjustments and the addition of all appropriate tax preference items.

Nonrefundable credits, such as the rehabilitation tax credit, may not be used to reduce the alternative minimum tax. If a taxpayer cannot use the tax credit because of the alternative minimum tax, the credit can be carried back or forward.

Property used by governmental bodies, nonprofit organizations, or other tax-exempt entities is not eligible for the rehabilitation tax credit if the tax-exempt entity enters into a disqualified lease (as the lessee) for more than 35% of the property. A disqualified lease occurs when:

• Part or all of the property was financed directly or indirectly by an obligation in which the interest is tax-exempt under Internal Revenue Code Section 103(a) and such entity (or related entity) participated in such financing; or,


• Under the lease there is a fixed or determinable price for purchase or an option to buy which involves such entity (or related entity); or,


• The lease term is in excess of 20 years; or,


• The lease occurs after a sale or lease of the property and the lessee used the property before the sale or lease.

Other Federal and State tax incentives exist for historic preservation. They may be combined with the rehabilitation tax credit.

Internal Revenue Code Section 170(h) and Department of the Treasury Regulation Section 1.170A-14 provide for income and estate tax deductions for charitable contributions of partial interests in historic property (principally easements). Generally, the IRS considers that a donation of a qualified real property interest to preserve a historically important land area or a certified historic structure meets the test of a charitable contribution for conservation purposes. For purposes of the charitable contribution provisions only, a certified historic structure need not be depreciable to qualify and may include the land area on which it is located.

As a result of the Pension Protection Act of 2006, a facade easement must preserve the entire exterior of the building. The Act requires a written agreement with the donee organization, additional substantiation requirements, and a $500 filing fee for all donations valued over $10,000. For additional information, see IRS Publication 526.

A number of States offer tax incentives for historic preservation. They include tax credits for rehabilitation, tax deductions for easement donations, and property tax abatements or moratoriums. The SHPO will have information on current State programs. Requirements for State incentives may differ from those outlined here.

The Tax Reform Act of 1986 (IRC Section 42) also established a tax credit for the acquisition and rehabilitation, or new construction of low-income housing. The credit is approximately 9% per year for 10 years for projects not receiving certain Federal subsidies and approximately 4% for 10 years for projects subsidized by tax-exempt bonds or below market Federal loans. The units must be rent restricted and occupied by individuals with incomes below the area median gross income. The law sets a 15-year compliance period. Credits are allocated by State housing credit agencies.

The following Standards govern whether buildings within a historic district contribute to the significance of the district. Owners of buildings that meet these Standards may apply for the 20% rehabilitation tax credit. Buildings within historic districts that meet these Standards cannot qualify for the 10% credit.

1. A building contributing to the historic significance of a district is one which by location, design, setting, materials, workmanship, feeling and association adds to the district's sense of time and place and historical development.


2. A building not contributing to the historic significance of a district is one which does not add to the district's sense of time and place and historical development; or one where the location, design, setting, materials, workmanship, feeling and association have been so altered or have so deteriorated that the overall integrity of the building has been irretrievably lost.


3. Ordinarily buildings that have been built within the past 50 years shall not be considered to contribute to the significance of a district unless a strong justification concerning their historical or architectural merit is given or the historical attributes of the district are considered to be less than 50 years old.

Rehabilitation projects must meet the following Standards, as interpreted by the National Park Service, to qualify as "certified rehabilitations" eligible for the 20% rehabilitation tax credit. The Standards are applied to projects in a reasonable manner, taking into consideration economic and technical feasibility.

The Standards (36 CFR Part 67) apply to historic buildings of all periods, styles, types, materials, and sizes. They apply to both the exterior and the interior of historic buildings. The Standards also encompass related landscape features and the building's site and environment as well as attached, adjacent, or related new construction.

1. A property shall be used for its historic purpose or be placed in a new use that requires minimal change to the defining characteristics of the building and its site and environment.


2. The historic character of a property shall be retained and preserved. The removal of historic materials or alteration of features and spaces that characterize a property shall be avoided.


3. Each property shall be recognized as a physical record of its time, place, and use. Changes that create a false sense of historical development, such as adding conjectural features or architectural elements from other buildings, shall not be undertaken.


4. Most properties change over time; those changes that have acquired historic significance in their own right shall be retained and preserved.


5. Distinctive features, finishes, and construction techniques or examples of craftsmanship that characterize a historic property shall be preserved.


6. Deteriorated historic features shall be repaired rather than replaced. Where the severity of deterioration requires replacement of a distinctive feature, the new feature shall match the old in design, color, texture, and other visual qualities and, where possible, materials. Replacement of missing features shall be substantiated by documentary, physical, or pictorial evidence.


7. Chemical or physical treatments, such as sandblasting, that cause damage to historic materials shall not be used. The surface cleaning of structures, if appropriate, shall be undertaken using the gentlest means possible.


8. Significant archeological resources affected by a project shall be protected and preserved. If such resources must be disturbed, mitigation measures shall be undertaken.


9. New additions, exterior alterations, or related new construction shall not destroy historic materials that characterize the property. The new work shall be differentiated from the old and shall be compatible with the massing, size, scale, and architectural features to protect the historic integrity of the property and its environment.


10. New additions and adjacent or related new construction shall be undertaken in such a manner that if removed in the future, the essential form and integrity of the historic property and its environment would be unimpaired.

For more information on tax incentives for historic preservation, contact the NPS, the IRS, or your SHPO. Available information includes:

• Caring for the Past, a catalog of NPS publications on appropriate methods to preserve historic buildings. These include Guidelines for Rehabilitating Historic Buildings, Preservation Briefs, and many others.


• The Historic Preservation Certification Application (a 3-part form: Part 1-Evaluation of Significance; Part 2-Description of Rehabilitation; Part 3-Request for Certification of Completed Work).


• Department of the Interior, National Park Service, regulations on "Historic Preservation Certifications."  [36 CFR Part 67].


• Market Segment Specialization Program: Rehabilitation Tax Credit (available only from the IRS).


• IRS guidance on the Historic Preservation Tax Incentives


• IRS Historic Preservation Tax Credit & Real Estate Tax Tips

Contact the National Park Service

Contact your State Historic Preservation Office