Saving historic buildings preserves New England’s character while providing opportunities for affordable housing and economic development. The authors describe how to use federal historic tax credits as well as New England’s state-level historic tax credits.Tax credits - New England ; Historic preservation - New England ; Housing - New England

John Leith-Tetrault

Kennedy Smith

English

Research Papers in Economics

Communities & Banking    3
Historic  buildings  shape  New  England’s 
character and reflect communities’ industri-
al, civic, ethnic, religious, and cultural heri-
tage. Iconic buildings like Barre’s union hall 
in Vermont, Boston’s Old North Church, 
and  Newport’s  waterfront  mansions  are 
integral  to  American  history,  along  with 
thousands of New England’s houses, barns, 
city  halls,  courthouses,  storefronts,  mills, 
churches, customs buildings, and theaters. 
Historic buildings also provide oppor-
tunities  to  create  high-quality  affordable 
housing. But in spite of a shortage of afford-
able housing, the nation demolishes an aver-
age of almost 600 old and historic buildings 
every day, buildings that could continue to 
enrich our towns and cities for generations 
to come.1
The Economy and 
the Community
Rehabilitating  historic  buildings  can  be 
challenging and expensive, and sometimes 
communities  with  other  priorities  balk. 
Fortunately, there is help for meeting many 
goals simultaneously.
The federal government offers income 
tax credits equal to a percentage of eligible 
rehabilitation  costs,  reducing  tax  liability 
by one dollar for every dollar of tax credit 
earned.2 From their 1976 launch through 
2006,  historic  rehabilitation  tax  credits 
helped finance more than 31,000 rehabili-
tations,  including  hundreds  of  thousands 
of  housing  units.  Additionally,  almost  30 
states have state programs that roughly par-
allel the federal program. (See “Preservation 
Tax Credit Programs in New England.”) 
Because the Tax Reform Act of 1986 
placed restrictions on individuals, credits are 
often more valuable for corporations, and 
tax credit syndication is common. The mar-
ket is well established, with tax credit pric-
ing influenced by a project’s size, perceived 
risk,  competition  for  tax  credits,  project 
timing, and so on. Investors typically pay 
95 to 99 cents per dollar of federal historic 
rehabilitation tax credit and 65 to 85 cents 
per dollar of state credit.3 
Tax Credit Basics
Options at the federal level are a 20 percent 
income tax credit for historic buildings and 
a 10 percent credit for buildings built before 
1936 but not historic.4
Claiming  10  percent  is  relatively 
straightforward: property owners determine 
that a building is not historic, then claim 
the credit on their federal income tax re-
turn. There are no rehabilitation standards 
or reviews. Claiming the 20 percent credit 
is somewhat more complicated.
To be eligible for the 20 percent federal 
historic rehabilitation tax credit, these crite-
ria must be met: 
  The building must be listed in the Na- • 
tional  Register  of  Historic  Places,  be  a 
“contributing”  building  in  a  National 
Register-listed historic district, or be eli-
gible for the listing.
  The project must be depreciable and in- • 
come producing.
  Qualified  rehabilitation  expenses  must  • 
equal or exceed the building’s basis (origi-
nal cost adjusted for factors such as depre-
ciation) or $5,000, whichever is greater 
(in other words, a “substantial rehabilita-
tion”).  Qualified  expenses  include  costs 
such  as  construction,  architectural  and 
engineering fees, construction-period in-
terest, and developer fees. They do not in-
clude acquisition, landscaping, new con-
struction, furnishings, and the like.
  Rehabilitation  must  meet  the  Secretary  • 
of the Interior’s Standards for Rehabilita-
tion.5 
  Substantial rehabilitation must take place  • 
within  a  defined  two-year  period  (five 
years under certain conditions).
To claim the credit, property owners 
must obtain plan approval from the state 
historic  preservation  office  and  National 
Park Service, plus final approval saying re-
habilitation was done correctly.6 The cred-
it can be carried back one year or carried 
forward up to 20 years. It can be combined 
with other tax credits (low-income-housing, 
state historic, and New Markets).7
The program has some limitations:
  The building’s depreciable basis must be  • 
reduced by the value of the tax credit.
  When coupled with low-income-housing  • 
tax credits, the reduced basis is used to 
calculate the housing credit.
  Historic rehabilitation tax credits cannot  • 
be transferred.
  A change of ownership within five years  • 
triggers credit recapture.  
  There are some “disqualified lease” restric- • 
tions on the use of rehabilitated property 
by tax-exempt entities.
The National Trust for Historic Pres-
ervation, the National Conference of State 
Historic Preservation Officers, Preservation 
Action, and others are supporting legisla-
tion to correct those limitations.8 
A New England Success
One example of the benefits of preservation 
tax credits is Providence’s Dreyfus Hotel.
Built in 1890, the four-story building 
was a downtown landmark for years, with 
a bar and dining room considered among 
the city’s finest intact commercial interiors. 
Johnson & Wales College purchased it in 
the 1970s and used it as a dormitory into 
TAX 
for Historic Rehabilitation
by John Leith-Tetrault and
Kennedy Smith
CREDITSthe 1990s. It was vacant until 2005, when 
a Providence-based nonprofit arts organiza-
tion, AS200, purchased it.9 AS200 plans a 
redevelopment that will include 14 hous-
ing units. Eleven will be restricted to art-
ists  earning  less  than  $25,000  annually; 
three will be market rate. There also will be 
10 artist studios, a restaurant, and a small 
ground-floor retail space. 
Although AS200 has had little experi-
ence in real estate development, the proj-
ect  has  financial  support  from  the  City 
of Providence, the State of Rhode Island, 
the  Federal  Home  Loan  Bank  of  Boston 
(FHLB Boston), and the Providence Pres-
ervation  Society  Revolving  Fund,  among 
others, making the $7.4 million project at-
tractive to tax credit investors. The National 
Trust Community Investment Corporation 
helped obtain a $3.4 million tax credit eq-
uity investment, combining the 20 percent 
federal  historic  rehabilitation  tax  credit—
and the 30 percent state historic rehabilita-
tion tax credit that Rhode Island had at the 
time—with federal New Markets tax cred-
its.  HUD’s  HOME  Investment  Partner-
ships Program, Rhode Island Housing, and 
Rhode  Island  Lead  Abatement  funds  are 
helping with financing; equity comes from 
the restaurant owner; the Providence Eco-
nomic Development Corporation is mak-
ing an acquisition loan; and FHLB Boston’s 
Affordable Housing Program is providing a 
first mortgage.
The  Dreyfus  Hotel  is  just  one  of  a 
growing number of projects in New Eng-
land and throughout the country in which 
historic rehabilitation tax credits have been 
pivotal in reusing historic buildings for af-
fordable housing and community facilities-
and connecting past and future.
John Leith-Tetrault is president of the Na-
tional Trust Community Investment Corpora-
tion, www.ntcicfunds.com, in Washington, DC. 
Kennedy Smith is a principal of the Com-
munity Land Use and Economics Group LLC, 
www.cluegroup.com, in Arlington, Virginia.
Tax Credit Programs in New England
Connecticut offers one tax credit program for historic homes and one for com-
mercial and industrial buildings rehabilitated for residential and mixed-use activities.
The Historic Homes Rehabilitation Tax Credit program provides a credit of 30 
percent of qualified rehabilitation expenses, up to $30,000 per unit, for up to four 
units. One of the units must be occupied by the property owner for a minimum of 
five years. Qualified rehabilitation expenses must total at least $25,000. Buildings 
must be listed in the National or State Register of Historic Places and must be 
located in a targeted area (generally one with family income levels below the state 
median). The program is capped at $3 million annually. 
The program provides a 25 percent credit for rehabilitating historic commercial 
and industrial buildings for residential use (partial credits are available for mixed-use 
projects). As of January 1, 2008, the state offers an add-on credit of 5 percent for 
projects that include affordable housing. The cap is $15 million annually, with a per-
project cap of $2.7 million. Credits may be used only by C corporations and can 
be transferred to other entities. Contact the Connecticut Historical Commission: 
(860) 566-3005, www.chc.state.ct.us.
Maine offers a 20 percent credit for income-producing properties that qualify 
for federal credits. Credits are capped at $100,000 annually per taxpayer. There is 
no statewide cap. The credit can be used by the building owner or lessee. As with 
the federal credits, qualified rehabilitation expenses must total the greater of $5,000 
or the building’s adjusted basis. Projects must comply with Department of Interior 
standards for rehabilitation. Contact the Maine Historic Preservation Commission: 
(207) 287-2132, www.maine.gov/mhpc.
Massachusetts offers a 20 percent historic rehabilitation tax credit. A build-
ing needs to be older than 50 years; it does not need to be listed in the National 
Register or contribute to a National Register-listed historic district. There is no 
minimum investment required and no per-project cap. The state program is capped 
at $50 million and is authorized through 2010. Projects must comply with De-
partment of Interior standards. Contact the Massachusetts Historical Commission: 
(617) 727-8470, www.sec.state.ma.us/mhc/mhctax/taxidx.htm.
New Hampshire offers tax incentives for preserving historic agricultural build-
ings. Contact the New Hampshire Division of Historical Resources: (603) 271-6435, 
www.nh.gov/nhdhr/barntaxincentives.html.
Rhode Island’s program was until spring 2008 one of the nation’s most gen-
erous, with a tax credit equal to 30 percent of qualified rehabilitation expenses 
for income-producing historic properties. Unfortunately, budget issues forced the 
state to withdraw the offer for future projects. Projects already accepted will be 
completed.10 Contact the Rhode Island Historical Preservation and Heritage Com-
mission: (401) 222-2678, www.preservation.ri.gov/credits.
Vermont provides a 10 percent add-on credit for projects located in designat-
ed downtowns and qualifying for the federal 20 percent tax credit. There is a cap of 
$50,000 per project and a statewide cap of $1.5 million.  Vermont also offers credits 
for specific improvements. These include a 50 percent credit for improvements that 
help historic buildings comply with building codes; a 25 percent credit for façade 
improvements for pre-1983 commercial buildings ineligible for federal historic reha-
bilitation tax credits; and reallocation of state retail sales taxes paid for construction 
materials purchased for improvement projects in designated districts. Each credit 
has a per-project cap ($50,000 for elevators, $12,000 for lifts, $50,000 for sprinklers, 
$25,000 for other code compliance work, $25,000 for façade improvements). For 
sales tax reallocation, caps are based on population size. Contact the Vermont Divi-
sion for Historic Preservation: (802) 828-3211, www.historicvermont.org/financial/
credits.html.Communities & Banking    5
Endnotes
Donovan  Rypkema,  “Economics,  Sustainability, 
1 
and  Historic  Preservation,”  speech  for  the  National 
Trust  for  Historic  Preservation,  2005,  http://www.
preservationnation.org/issues/transportation/
additional-resources/rypkema-speech-sustainability-
portland-10012005.pdf.
The program is administered jointly by the National 
2 
Park  Service  and  the  Internal  Revenue  Service.  See 
Tax  Aspects  of  Historic  Preservation,  www.nps.gov/
history/hps/tps/tax/IRSQ_A.htm.  The  National 
Trust Community Investment Corporation offers an 
interactive online questionnaire that helps determine 
if  a  project  is  eligible  for  historic  rehabilitation  tax 
credits: www.ntcicfunds.com.
Because  state  income  taxes  are  a  deduction  from 
3 
federal taxable income, state tax credits are priced lower 
to offset the lost federal deduction.
“Historic” may imply not just historic significance, 
4 
but also architectural or cultural.
See  http://www.nps.gov/history/hps/tps/tax/rehab 
5 
standards.htm.
The building’s owner or developer must file a form 
6 
with  the  National  Park  Service.  Part  I  certifies  that 
the building is historic; Part II outlines rehabilitation 
plans;  Part  III  certifies  that  the  rehabilitation  was 
completed correctly. See www.nps.gov/history/hps/tps/
tax/hpcappl.htm.
The  New  Markets  Tax  Credit  Program  permits 
7 
taxpayers  to  receive  a  credit  against  federal  income 
taxes  for  making  qualified  equity  investments  in 
designated  community  development  entities.  See 
http://www.cdfifund.gov/what_we_do/programs_
id.asp?programID=5.
See http://www.preservationnation.org/issues/rehabil 
8 
itation-tax-credits/community-restoration-and.html.
AS200  stands  for  Artists  Space  at  200  Weybosset 
9 
Street, where the organization was launched in 1985.
See  http://www.preservation.ri.gov/pdfs_zips_down 
10 
loads/news_pdfs/08-04-07hpitc.pdf.
This Communities & Banking article is copyrighted 
by the Federal Reserve Bank of Boston. The views 
expressed are not necessarily those of the Bank or 
the Federal Reserve System. Copies of articles may 
be  downloaded  without  cost  at  www.bos.frb.org/
commdev/c&b/index.htm.

Tax credits for historic rehabilitation

http://www.bostonfed.org/commdev/c&b/2008/fall/Leigh-Tetrault_Kennedy_tax_credit.pdf

Tax credits for historic rehabilitation

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics