TAX INCENTIVES

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PRESERVATION

• TAX INCENTIVES
• FOR
• HISTORIC BUILDINGS

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Federal Rehabilitation Investment Tax Credit (ITC)
Section 251 of the Tax Reform Act of1986 Code of
Federal Regulation Title 26 The essential
purpose of the ITC is to encourage the
conservation and reuse of historic and other
older buildings, our nations heritage
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REHABILITATION

• Gives old and historic buildings a place in the
  contemporary real estate market
• Preserves buildings not as museums but as useful
  structures meeting retail and commercial needs

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From 1982 through 1993, the historic
rehabilitation credit stimulated an estimated
investment of 14.8 billion in nearly 20,500
historic buildings. More than 70 of historic
projects incurred expenditures of less than
500,000 and nearly a third have been projects of
less than 100,000. More than 125,000 housing
units have been rehabilitated sites historic
since the program began. Nearly 63,000 new units
have been created
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Historical Perspective

• Between 1981 and 1986 more private money was
  invested in the rehabilitation of historic
  buildings than had been spent for the same
  purpose during all of the rest of American
  history
• Federal tax incentives, first adopted in 1976 and
  then expanded in 78 and 81 saved thousands of
  important historic buildings
• These incentives were some of the most potent,
  effective urban revitalization tools ever
  created. . .

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What are preservation tax incentives?

• One of the few tax credits available to encourage
  real estate development
• A credit that can be taken on federal income tax
  amounting to 20 of the cost of work done to
  renovate historic buildings.
• A dollar-for-dollar reduction of income tax, not
  just a deduction to reduce earnings.

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What is the Rehabilitation Tax Credit?

• The federal income tax credit is equal to 20 of
  the cost of rehabilitating historic buildings or
  10 of the cost of rehabilitating nonhistoric
  buildings constructed before 1936
• Neither credit is available at this time for
  homes or apartments occupied by their owners

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Calculating the Adjusted Basis
100,000 Original cost of property 15,000
previous capital improvements, etc. 115,000
(subtotal) - 30,000 cost of land only
85,000 (subtotal) - 10,000 minus
depreciation taken to date 75,000 equals
Adjusted Basis So, if 80,000 in qualified
expenditures is spent on the rehabilitation. . .
20 ITC 16,000 Credit
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What kind of buildings are considered historic?

• A building listed on the National Register of
  Historic Places (either an individual listing or
  a contributing part of a historic district)
• Generally, buildings must be at least 50 years
  old
• Alabama Historical Commission has a list of
  eligible buildings

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Contact a Tax Professional
There are many ways that any particular tax
situation can be affected by this program, so a
qualified professional should be consulted early
in this process. No one on the Historical
Commission or in the real estate industry is
qualified to advise on this matter
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Which old buildings qualify for preferential tax
treatments?

• Income producing buildings listed in the National
  Register of Historic Places are eligible for two
  different kinds of preferential tax treatments
  (1) 50 reduction of property taxes under the
  Wallace Property Relief Constitutional Amendment
  and (2) a dollar for dollar credit against income
  tax liability for cost of rehab that meets
  national preservation standards.

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How can I get my building certified as
contributing to the district?

• Complete the form Historic Preservation
  Certification Application, Part I available from
  the Alabama Historical Commission. Send the form
  and before interior and exterior photos to the
  National Register Coordinator for Alabama
  Historical Commission

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How long does this take?

• When Part I has been submitted, it will be
  reviewed by the staff and forwarded to the
  National Park Service in Atlanta for final
  certification.
• Entire process takes two to three months.

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What kind of work can I do on the building to get
the credits?

• Certified Rehabilitation must be done. As many
  of the important elements of the building as
  possible must be saved.
• All costs involved in renovation are eligible for
  credit, except purchase, furnishing, landscaping
  and parking costs.

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How much money do I have to spend?

• Either 5000.00 or more than the adjusted basis
  of the building, whichever is greater.
• The building must be used for income-producing
  purposes offices, farms, residential rentals
  such as apartments or bed-and-breakfast
  establishments.

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What expenditures qualify?

• Expenditures that are capital in nature and
  depreciable as real property
• Repairs and improvements which are part of an
  overall rehabilitation
• Architectural and engineering fees
• Legal expenses
• Development fees

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What are some expenses that do not qualify for
the rehabilitation tax credit?

• Acquisition costs
• Appliances
• Cabinets
• Carpeting if tacked in place
• Decks, porches, porticos, if not part of original
  building
• Demolition costs
• Enlargement costs
• Fencing and retaining walls
• Feasibility studies
• Financing fees

• Furniture
• Landscaping and paving
• Leasing expenses
• Moving (building) costs
• Outdoor lighting remote from building
• Parking lot and paving
• Window treatments
• Planters
• Storm sewer construction
• Retaining walls

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PITFALLS TO AVOID

• Building without approval from Alabama Historic
  Commission
• Unnecessary replacement of doors and windows
• Destruction of historic elements
• Inappropriate additions and alterations
• Abrasive cleaning methods
• Painting previously unpainted surfaces
• Adding a false historic appearance
• Imposing a new aesthetic on old fabric that
  changes the character

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Take care with exterior additions and changes

• Make no façade changes that are not documented
  and approved
• Appropriateness to location is a big factor to
  acceptability

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Base your renovation on facts and history
Talk to people who have been in the area a long
time. Find out what people remember about how
the building looked.
Repair, restore, renovate
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Remember

• The National Park Service is the ultimate
  authority in certification
• The Alabama Historical Commission makes the
  process easier by providing initial review

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A THREE-PART REVIEW PROCESS FOR 20 TAX CREDIT

• Evaluation of significance
• Description of rehabilitation
• Request for certification of completed work

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Description of Rehabilitation

• Owner submits plans of proposed work to be
  reviewed by state historic preservation office
  for compliance with standards set by Secretary of
  Interior
• Owner consults with state historic preservation
  office reviewer in early stages about
  appropriateness of proposal

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Evaluation of Significance

• Nomination form describing property must be
  submitted
• State historic preservation office determines
  eligibity for listing in National Register
• National Park Service also reviews application
  before granting final approval
• Property can be listed individually or as a
  contributing structure to a historic district

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Request for Certification of Completed Work

• Owner submits cost expenditure summary,
  photographic evidence and general information
  about property owner
• State historic preservation office visits the
  site, reviews the work based on submitted
  materials
• State historic preservation office makes a
  recommendation to National Park Service
• Written certification from National Park Service

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How do I apply for the credits?

• Fill out a two part application
• Take BEFORE pictures of the project inside and
  out
• Send two sets of photographs along with
  application to Alabama Historical Commission (a
  free public service)
• Final approval comes from National Park Service
  which will request a 250 fee.

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How do I take the credits?

• Send two sets of photographs of completed
  restoration with Certification for Completed
  Work to Alabama Historical Commission for review
  and referral to National Park Service.
• When Park Service returns the Certification,
  file it with federal tax forms in order to claim
  credits.

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Are there provisions in the Internal Revenue Code
that could prevent a taxpayer from using the
rehabilitation tax credit?

• The alternative minimum tax the unused credit
  can be carried back or forward. The AMT is
  designed to prevent a taxpayer with substantial
  income from avoid significant tax liability
• The tentative minimum tax can reduce the amount
  of rehabilitation tax credit that can be used.
• Passive activity tax rules the unused credit
  can be carried forward

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Home Ownership Assistance Act
Representatives Bud Cramer and Earl Hilliard are
co-sponsors of H.R. 1172 and S. 920. These
companion bills have been introduced in both the
House and the Senate. They will provide for tax
incentives for rehabilitation of residential
properties that have historical importance
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Our historic properties are a treasure to be
cherished and preserved. Without them, we lose
not only a sense of where we have been but also
an understanding of our place in todays world.