Five Things to Know About Historic Tax Credits

DOWNLOAD OUR GUIDE TO HISTORIC TAX CREDITS HERE.

An exterior photo of the Checker Cab building. — Built in 1927, the Checker Cab building was originally a parking garage for a taxi company’s fleet. We transformed the building to accommodate rental apartments.

You may know that the Federal Historic Preservation Tax Incentives program can help fund transformative renovations of historic buildings for new uses—but did you know it can’t be used for a private residence? Read on to learn some surprising facts about funding capital projects through federal historic tax credits.

1. Your home probably isn’t eligible for the program.

The federal historic tax credit cannot be used to rehabilitate a private residence. After rehabilitation, the building must be used for an income-producing purpose for at least five years—including commercial, industrial, agricultural, and rental residential use. However, if a portion of a personal residence is used for business, such as an office or a rental apartment, in some instances the rehabilitation costs spent on that portion of the residence may be eligible for the credit.

2. It’s a tax credit, not a tax deduction.

Tax credits provide a one-to-one offset of the recipient’s tax burden—unlike tax deductions, which lower the recipient’s taxable income. The federal historic tax credit is non-refundable, meaning any portion of the credit that is not used of offset a federal income tax burden will not be refunded. This is why recipients with low tax burdens (including nonprofit organizations, which do not pay federal income taxes) often choose to syndicate their tax credits—more on that later.

3. The credit isn’t claimed in a lump sum.

The federal historic tax credit is claimed over a five-year period, with one-fifth (20%) of the total claimed per year. The tax credit can begin to be claimed when completing taxes for the year the building is “placed in service” (begins to fulfill its income-producing function). For example, for a building placed in service in 2024, one-fifth the tax credit would be claimed in 2025 when the entity submits its 2024 taxes, continuing for the next four years.

4. Historic tax credits can be syndicated.

Federal historic tax credits can be syndicated (transferred to an investor). Tax credit syndication requires the building owner and an investor to form a legal entity like a limited partnership or limited liability company. This arrangement allows the building owner to receive capital sooner, while the investor claims the tax credits over the five-year period after the building is placed in service—or, in the case of a nonprofit owner, to benefit from the tax credits at all.

5. Historic tax credits can stack with other federal tax credit programs.

Federal historic tax credits can be used in conjunction with other federal tax credit programs, including the Low-Income Housing Tax Credit (LIHTC) program and the New Markets Tax Credit (NMTC) program. However, note that LIHTCs and NMTCs do not stack with each other—in other words, a project is not allowed to receive both NMTCs and LIHTCs.