Congress has the opportunity to make the biggest improvements and enhancements to the Historic Tax Credit (HTC) in a generation. Though the recent House version of the “Build Back Better” bill did not include any HTC enhancements, the Senate is poised to take up its version over the next few weeks and may offer several changes, including to the tax credit provisions.
HTC advocates are urging the Senate to include enhancements that were proposed in the House version of the Historic Tax Credit Growth and Opportunity Act (HTC-GO/H.R. 2294) and would increase the amount and value of the credit, improve access to financing for smaller-scale developments, and more. If passed, the legislation would be the most significant expansion of the HTC in a generation. Let’s look at how these provisions will support historic preservation initiatives for years to come.
Sec. 135301: HTC Percentage Increase
Currently, the HTC provides a 20% credit to project costs directly associated with the repair or improvement of historic structural and architectural features of a building, also known as qualified rehabilitation expenditures (QREs). This percentage is the foundation for all equations for determining the value of the HTC through the rehabilitation process.
For example, under the current law, a project with $200,000 in historic rehabilitation costs could receive up to $40,000 in HTCs ($200,000 x 20% = $40,000).
If passed, this bill will increase the HTC percentage from 20% to 30% through 2025. This is a 50% increase in value and benefit to historic preservation projects, so that same project with $200,000 in rehab costs would generate $60,000 in credits ($200,000 x 30% = $60,000). For projects generating more than $2.5 million in QREs, the increase would be in effect from 2020 through 2025 before gradually returning to 20% in 2028. Properties must complete the rehabilitation efforts after March 31, 2021, to be eligible for this provision.
The Historic Tax Credit enhancements will better support community development projects like the Academy Lofts building in Atlanta, GA, the new home to The Creatives Project, a nonprofit organization providing quality arts-based education & outreach through artist-in-residency programs.
Sec. 135302: Permanent Increase in the Rehabilitation Credit for Small Projects
The HTC is not just for large-scale projects and developers. In fact, in 2020 alone, over half of all completed historic projects that utilized the HTC were under $2.5 million in qualified costs, and 19% were projects under $250,000.
For these smaller projects, after December 31, 2021, a taxpayer would be able to elect a “small project credit” and receive the 30% tax credit for projects with qualified costs up to $2.5 million or less. This increase for small projects would be permanent. This change would ensure rural and non-urban areas are better positioned to benefit from utilizing HTCs even after the temporary 30% credit for larger projects expires in 2025.
Sec. 135303: Redefinition of “Substantial Rehabilitation”
To be eligible for HTCs, a project must pass the “Substantial Rehabilitation” test. Generally, this means that a project must spend the greater of either $5,000 or the pre-rehabbed worth of the building itself, also known as the “adjusted basis.” Currently, a project can determine its adjusted basis by completing the equation A-B-C+D = Adjusted Basis, where:
A. Purchase price of the property, both building and land
B. The cost of the land at the time of purchase
C. Depreciation taken for an income-producing property
D. Costs of improvements made to the property since its purchase
The new provision cuts the substantial rehabilitation requirement in half so that qualified rehabilitation expenditures must exceed the greater of 50% of the adjusted basis of the building rather than 100%. This reduction effectively updates the adjusted basis equation to (A-B-C+D)/2 = Adjusted Basis.
Lowering the rehabilitation cost requirements will greatly increase the HTC eligibility for countless projects and make the cost of entry much more approachable.
For example, an individual purchased a historic building for $200,000 ($150,000 for the building and $50,000 for the land). Under current law, the building’s new owners would need to incur at least $150,000 in rehabilitation costs to qualify for the credit. The new bill provision would reduce this threshold to $75,000 in rehabilitation costs.
Sec. 135304. Elimination of Rehabilitation Credit Basis Adjustment
For a larger-scale project to generate project funding at the onset of development using the HTC, rather than claiming the credits come tax season, a building owner needs to partner with an investor that has both the ability to use the credits themselves and available funding. The investor can then provide financing to the project, typically a percentage of a dollar per credit, in exchange for the ability to claim the credits themselves – lowering the amount of taxes the investor owes at the end of the year.
Currently, the financial and legal process of a building owner and investor partnering in this way requires an investor to recognize income in the amount of credits they can claim, which often results in a lower price per credit the investor can offer to a project. Essentially, the current law lowers the dollar value of the HTC, and the amount of funding a project can receive from an investor.
With the new provision, an investor no longer needs to recognize income in the amount of the HTC to claim the credit. By eliminating this adjustment, an investor can provide more funding per credit to a project. Though complex, this change would place the HTC in line with other development credits like the Low Income Housing Tax Credit (LIHTC) and make it easier to use with such programs.
Sec. 135305. Modifications Regarding Certain Tax-Exempt Use Property
Currently, to generate HTCs, a building owner and its tenants must be taxable entities. This requirement prevents many nonprofit healthcare centers, daycare organizations, arts organizations, and community service providers from engaging in historic preservation activities, especially if they already own and use their historic property.
This provision would amend and remove certain leasing and tax-exempt use restrictions, making the HTC easier to access by nonprofits who provide critical community services and other tax-exempt entities.
Sec. 135306. Qualification of Rehabilitation Expenditures for Public School Buildings
Similar to nonprofit organizations, certain public or government-owned buildings such as those that have had prior use as public schools and will continue to serve the same purpose post-renovation are typically not eligible for HTCs, forcing local governments to abandon or demolish many of these long-vacant facilities rather than restore use them for community-serving purposes.
The new provision would allow public school buildings to better use the HTC by exempting public school buildings that have been used as public schools within the past five years from certain tax-exempt use rules.
To read the full text of the section-by-section breakdown of the infrastructure bill, Click Here (HTC on Pages 3 and 4).