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What are Federal Historic Tax Credits and How do They Work?

October 7th, 2021 | 4 min. read

What are Federal Historic Tax Credits and How do They Work?

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Rehabilitating an older building can be an unpredictable and expensive process. Despite their character and charm, historic structures often come with unforeseen conditions and costs. If you are planning to undertake a rehabilitation or renovation project, it is important to explore every avenue of funding. 

Luckily, the Federal Historic Preservation Tax Incentive Program can help fund a complex rehabilitation project. The program is designed to encourage the redevelopment and reuse of historic structures. Each year, it leverages nearly $6 billion in private investment for over 1,200 projects.  

At Neumann Monson, we have partnered with many developers who have utilized historic tax credits. Our experience includes the Wilkin’s Building in Des Moines, a beloved department store that was carefully restored after a fire, and Market One, a turn-of-the-century factory that achieved near net-zero energy performance while maintaining its original features.  

Our experience has given us a thorough understanding of historic tax credits, the program’s requirements, and the application process. To help you determine if tax credits are right for your project, we created an overview of the program. Read on to learn if the program fits your project and goals.   

What are Federal Historic Tax Credits?  

The Federal Historic Preservation Tax Incentive Program began in 1976 with the goal of encouraging private investment in neglected properties. Since the program’s founding, tax credits have proved an effective incentive for redevelopment. Every dollar the federal government invests in tax credits generates $15 in private investment. 

Tax credits differ from tax deductions. While a tax deduction lowers the amount of income subject to taxation, a tax credit reduces the amount of tax owed. For example, a $1,000 tax credit lowers your tax bill by $1000.  

Wilkins Building

Wilken’s Building in Des Moines, IA.

Who Administers the Program?  

Throughout the design, application, and construction process, you work with three government agencies. The program is administered through the National Park Service (NPS) and the Internal Revenue Service (IRS), two federal bodies that work in partnership with your local State Historic Preservation Office (SHPO).  

The NPS reviews applications and certifies historic structures, while the IRS oversees the financial side of the program and administers credits. For building owners and architects, the SHPO is the primary point of contact. On most projects, the SHPO provides application forms, maintains records of historic buildings and districts, and makes certification recommendations to the NPS. Before and after construction, architects submit drawings, plans, and other specifications to the SHPO who reviews them and sends them to the NPS for approval.  

How does the Program Work?  

The program offers a 20% tax credit. This means you will receive a tax credit equal to 20% of your renovation expenses. According to the NPS, only work related to the operation of the building counts toward the 20% credit. This includes:  

  1. Architectural and engineering fees 
  2. Site survey fees 
  3. Legal expenses  
  4. Development fees  
  5. Construction related costs. 
  6. Plumbing, electric, heating and cooling costs.  

Some expenditures do not count toward the 20% credit. Excluded costs include:  

  1. Costs of furniture, cabinets, and appliances  
  2. Costs related to building acquisition, moving, and leasing 
  3. Costs related to outdoor amenities like parking lots, sidewalks, signage, and landscaping.

What is a “Certified Historic Structure?”  

To receive 20% tax credits, the building must be a “certified historic structure.” This means the building is either listed on the National Register of Historic Places or is considered a “contributing resource” in a registered historic district. “Contributing resources” are buildings that add to the historic or architectural significance of a district. Depending on the district, the NPS may specify a period of historic significance, and buildings outside that period may be deemed “noncontributing.” 

If you are unsure if your building qualifies, you will need to contact a historian or architect who will research the building and the district in which it is located. To receive the tax credit, you may need to place your building on the National Historic Register by applying with the NPS. In later articles, we will discuss the application process in greater detail.  

Push Branding offices in Market One

Interior of Market One in Des Moines, IA.

Interested in Applying?  

Federal Historic tax credits can help fund complex rehabilitation projects that maintain our nation’s historic character. The program has strict requirements, and not all projects are eligible. An experienced architect can help you meet the requirements and walk you through the application process. To learn more, check out our guide to the historic tax credit application process.