With more than 30 years of consistent tax legislation, the federal historic tax credit program seemed to be as steadfast as the heavy timber and masonry buildings that it helps to preserve. Then, in the uncertainty of the 2017 tax reform — the House proposed eliminating historic tax credits entirely while the Senate proposed retaining partial credits — the existence of this powerful program was questioned and threatened, creating confusion and panic throughout the building reuse industry.
Ultimately, the final tax bill retained a portion of the historic tax credit program and changed the timeline for claiming the credits. This spurred a race for real estate developers to close on pending building purchases by Dec. 31 in order to fall under the more favorable tax rules for historic building reuse.
Tax policy has been used to incentivize building reuse since 1976. Tax legislation that promoted building reuse was first introduced amidst bipartisan concerns about the decline of urban centers, the need for environmental conservation, and the relocation of corporate offices away from Main Street.
Building reuse, and not just saving historic buildings, was considered an important piece of the solution to create thriving downtowns. The first program included new rules for amortization and depreciation that encouraged reuse rather than demolition by allowing building owners to take a five-year rapid amortization of the renovated building. It also eliminated the demolition tax deduction for designated historic buildings. The policy was strengthened in 1978 with the adoption of a 10 percent investment tax credit for the rehabilitation of any business-related building 20 years or older.
The wave of building reuse expanded with the Economic Recovery Tax Act of 1981, which created a three-tier historic tax credit program that included a 15 percent tax credit for reuse of non-residential buildings more than 30 years old, a 20 percent credit for the reuse of non-residential buildings more than 40 years old, and an astounding 25 percent credit for the reuse of a building listed in the National Register of Historic Places, or “certified.”
In 1986, those incentives were scaled to a two-tiered program that included a 10 percent tax credit for the reuse of non-historic buildings constructed prior to 1936 and a 20 percent tax credit for the reuse of certified historic buildings.
Historic tax credits are calculated based on qualified rehabilitation expenditures (QREs), including hard and soft costs that are demonstrably related to the reuse of the building. The reuse project must be a “substantial rehabilitation” wherein the QREs exceed the basis of the building. Finally, the design and construction of all projects must be approved by the Secretary of the Interior.
Real estate developers and historic preservation advocates alike recognize the power of tax incentives. Since the first iteration of the program in 1976, more than 42,000 building reuse projects have been completed resulting in an investment of more than $84 billion in rehabilitation and 2.44 million jobs.
The federal historic tax credit program enhanced property values and increased both market-rate and affordable housing. Likewise, more than 30 states have added similar incentives to “piggyback” on the federal historic tax credit. There is a direct correlation between strong state incentives and the use of the federal historic tax credit. Minnesota offers a matching 20 percent state historic tax credit for qualifying projects. The most active states in 2016 for historic tax credits included Missouri, Virginia, Louisiana and New York.
The 2017 Tax Cuts and Jobs Act will undoubtedly decrease historic building reuse. The 10 percent credit was eliminated and the 20 percent credit will now be awarded over five years rather than one, which will result in a lower net financial value to the projects.
While previous tax incentives positioned building reuse as part of a comprehensive approach to creating thriving commercial centers, the current policy divorced building reuse from the larger economic environment by assessing the tool as an incentive for historic preservation only. By looking at the historic tax credits in isolation, the true economic and social impact of building reuse was, and will be, eroded.
Meghan Elliott is the founding principal and president of PVN, a consulting practice for innovative building reuse and heritage preservation strategies. She can be reached at [email protected].