Tax Incentives for Historic Buildings
Federal Preservation Tax Incentives for Historic Buildings
The Federal Preservation Tax Incentives Program encourages the reuse and rehabilitation of historic buildings through two tax benefits: federal rehabilitation tax credits and charitable contribution deductions for the donation of preservation easements. Both incentives are available for historic buildings or buildings within districts that are listed on the National Register of Historic Places (National Register) and/or are contributing structures to “registered historic districts,” which includes National Register-listed historic districts and state or local historic districts that are certified by the U.S. Secretary of the Interior (Secretary). The programs are administered by the Pennsylvania Historical and Museum Commission (PHMC) on behalf of the National Parks Service and the U.S. Secretary of the Interior.
Rehabilitation Tax Credits
Two levels of rehabilitation tax credits are available: a 20% rehabilitation tax credit for projects that the Secretary designates as certified rehabilitation of a historic structure and a 10% rehabilitation tax credit for the rehabilitation of non-historic buildings placed in service before 1936. The 20% rehabilitation tax credit is more frequently used in the Pittsburgh region. It was instrumental in the financing of the Heinz Lofts, the Armstrong Cork Factory, the Bedford Springs Resort, and Market at Fifth––a project of the Pittsburgh History & Landmarks Foundation.
To access the 20% rehabilitation tax credit, owners and developers must fully comply with the Internal Revenue Service’s requirements. The process is overseen and managed by PHMC and includes, among other things, a three-part application that: (i) certifies that the building is a certified historic structure; (ii) approves the plans and specifications for the rehabilitation work, and (iii) certifies that the rehabilitation was completed in accordance with the plans after the work is complete. The 20% rehabilitation tax credit requires that:
- the building is a certified historic structure (as discussed above);
- the building is depreciable, i.e. income producing such as offices or rental housings;
- the rehabilitation is substantial; and
- the property must be placed in service or put into use after the rehabilitation, among other things.
Section 170(h) provides a charitable contribution deduction for a donation of a preservation easement on certified historic structures to a qualified organization such as PHLF. In exchange, the donor of a preservation easement receives a federal charitable contribution deduction equal to the fair market value of the preservation easement as determined by a “qualified appraisal” conducted by a “qualified appraiser.”
A preservation easement is a legal agreement negotiated between the donor/property owner and PHLF that places restrictions on the exterior, and sometimes the interior, of a historic property so that it will be preserved forever or in perpetuity. The owner retains the right to make changes to the property in accordance with the Secretary’s Standards for Rehabilitation. The preservation easement is recorded in the local recorder of deeds office and runs with the land. PHLF is then responsible for monitoring the property on an annual basis to ensure compliance.
PHLF has received over 30 preservation easements on buildings in Allegheny, Bedford, Butler, Greene, Washington, and Westmoreland Counties. These include single-family homes, large industrial complexes that have been rehabilitated into apartments, downtown condominium buildings, historic farms and farmland, and a historic resort hotel. More information on preservation easements and PHLF’s preservation easement program can be found at the following Web sites: PHMC, NPS and PHLF.
NOTE: PHLF does not provide tax or legal advice. The above information is for informational purposes only and does not include all of the details and requirements of the Federal Preservation Tax Incentive Programs or the Internal Revenue Code. Please consult your own attorney and tax advisor if you are interested in these programs.