Historic Tax Credit Lexicon
For the purposes of the substantial rehabilitation test, the adjusted basis of a building typically equals the cost of the property, less property cost attributable to land (consult with your accountant to determine this number), plus previously made capital improvements, less depreciation.
Alternative Minimum Tax
Taxpayers who are paying less than the minimum tax rate under the regular tax system may be liable for additional tax under the alternative minimum tax laws. Alternative minimum taxable income is computed from regular taxable income with certain adjustments and the addition of all appropriate tax preference items.
A taxpayer may deduct losses and obtain credits from a real estate investment only to the extent that the taxpayer is “at-risk” for the investment. The amount that a taxpayer is at-risk generally is the sum of cash or property contributions to the project plus any borrowed money for which the taxpayer is personally liable, including certain borrowed amounts secured by the property used in the project. In addition, in the case of holding real property, the amount at-risk includes qualified non-recourse financing borrowed from certain financial institutions or government entities.
Any structure or edifice enclosing a space within its walls and usually covered by a roof, the purpose of which is to provide shelter or housing, working, office, parking, display, or sales space.
Certified Historic Structure
A structure that is either listed individually on the National Register of Historic Places or is a contributing building in a National Register, or State or Local Historic District that has been certified by the Secretary of the Interior. This status is gained by the National Park Service approving Part 1 of the Historic Preservation Certification Application.
Any rehabilitation of a certified historic structure determined by the Secretary of the Interior or his representative to be consistent with the historic character of the property, pursuant to the Tax Reform Act of 1986.
A donation to a charitable organization whose value may be deducted from gross income for purposes of determining how much tax is owed.
Act of identifying historic structures and districts subject to regulation in historic preservation ordinances or other preservation laws.
Defined by the Internal Revenue Code Section 168(h) as a lease to a tax-exempt entity where: (1) part or all of the property was financed directly or indirectly by an entity that is tax-exempt under Internal Revenue Code Section 103(a) and such entity (or related entity) participated in the financing, or (2) under the lease there is a fixed or determinable purchase price or an option to buy, or (3) the lease term is in excess of 20 years, or (4) the lease occurs after a sale or lease of the property and the lessee used the property before the sale or lease.
Partial interest in property that can be transferred to a nonprofit organization or government entity by gift or sale to ensure protection of a historic resource and/or land is in perpetuity.
A legal agreement granting in perpetuity an easement to a qualified nonprofit organization designed to protect the façade of a certified historic structure. Property owners receive a federal tax deduction equal to the value of the facade easement in exchange for promising to maintain, protect and preserve in perpetuity the façade of the certified historic structure.
An area that generally includes within its boundaries a significant concentration of properties linked by architectural style, historical development, or past event.
Participation in an activity for any tax year that satisfies one of several tests, including:
- participation in the activity for more than 500 hours during the year;
- where the individual’s participation was substantially all of the participation of all individuals in the activity during the year; and
- participation in the activity for more than 100 hours during the year if the individual participated more than anyone else.
Application of these and the other material participation tests often involves intricate tax analysis. Contact a tax attorney or accountant with questions about materially participating in an activity.
National Historic Preservation Act
The federal law that encourages the preservation of cultural and historic resources in the United States.
National Register of Historic Places
The National Register of Historic Places is the nation’s official list of cultural resources worthy of preservation. Authorized under the National Historic Preservation Act of 1966, the National Register is part of a national program to coordinate and support public and private efforts to identify, evaluate, and protect our historic and archeological resources. Properties listed in the register include districts, sites, buildings, structures, and objects that are significant in American history, architecture, archeology, engineering, and culture. The National Register is administered by the National Park Service, which is part of the U.S. Department of the Interior.
New Markets Tax Credit
In December 2000, the U.S. Congress passed the Community Renewal Tax Relief act, creating the New Markets Tax Credit (NMTC) program. This program is designed to provide a tax credit to investors to encourage investments in qualified low-income communities that traditionally have had poor access to debt and equity capital. Investments to qualified businesses occur through community development entities (CDEs).
Part 1 of the Historic Preservation Certification Application is the Evaluation of Significance by the National Park Service (NPS). It usually contains a narrative describing the history of the building so the NPS can determine if the building contributes to the historic district within which it is located. Buildings listed individually on the National Register are automatically certified historic structures and no Part 1 is needed. It must be submitted to the NPS via the state historic preservation office (SHPO). The NPS must also deem a building a non-certified historic structure in order to be eligible for the 10 percent Rehabilitation Tax Credit.
Part 2 of the Historic Preservation Certification Application is the Description of the Rehabilitation. It must be submitted to the National Park Service (NPS) via the state historic preservation office (SHPO). The Department of the Interior reviews the description and makes the decision as to whether it conforms to the Secretary of the Interior’s Standards for Rehabilitation. The ruling is conveyed through NPS. While the rehabilitation may involve repair or alteration of a historic property, it may not destroy or damage the interior and exterior material and features that define the building’s historic character. A conditional approval may be granted which is contingent upon certain adjustments to the rehabilitation plan. The Part 2 application may be submitted to NPS at any time during the course of the rehabilitation, yet it is advisable to do so before work commences in case modifications are ordered. Any alteration to the original work plan during construction must be submitted as an amendment to the NPS for their review.
Part 3 of the Historic Preservation Certification Application is the Request for Certification of Completed Work. It must be submitted to National Park Service (NPS) via the state historic preservation office (SHPO) after the rehabilitation is completed. The application must be accompanied by photographs documenting the completed project. The NPS issues an approval if the completed rehabilitation conforms to the Secretary’s Standards.
Passive activities are those activities in which the taxpayer is not involved on a regular, continuous and substantial basis. Limited partner investors in rehabilitation projects are presumed to be involved in a passive activity. In addition, rental activities, including the rental of rehabilitated buildings are considered passive activities. Non-passive activities income includes wages and portfolio income such as stock dividends, stock capital gains, and interest on bank accounts.
Passive Activity Rules
Prohibit the use of deductions and credits from passive activities, those in which the taxpayer is not involved on a regular and substantial basis, to offset income and taxes owed from non-passive activities.
Placed-in-service means that the appropriate work that would allow for occupancy of either the entire building or some identifiable portion of the building has been completed. An occupancy permit issued by the local government authority or a certificate of substantial completion issued by the project inspecting architect often serves as evidence the building is placed-in-service.
Dividends, interest, annuities and royalties not earned in the conduct of a trade or business, together with gains from the disposition of property that produces this type of income or from property otherwise held for investment.
Qualified Rehabilitation Expenditures (QREs)
Expenditures that are connected with the rehabilitation or restoration of the qualifying structure. Examples of qualified rehabilitation expenditures (QREs) include: construction costs, construction interest and taxes, architectural and engineering fees, legal costs, developer’s fees, general and administrative fees and other construction-related expenditures if such costs are added to the basis of the property and are determined to be reasonable and related to the services performed. The cost of other work, such as additions to the structure, does not qualify as a qualified rehabilitation expenditure. Examples of costs that do not count as qualified rehabilitation expenditures include: acquisition costs, enlargement (addition) costs, furnishings, acquisition interest and taxes, realtor’s fees, paving and landscaping costs, sales and marketing costs.
Rehabilitation Tax Credit
A 20 percent credit on federal income tax for the substantial rehabilitation of certified historic properties.
Secretary of the Interior’s Standards for Rehabilitation
A set of 10 rehabilitation standards against which the Department of Interior reviews all rehabilitations.
Provision in the National Historic Preservation Act that requires federal agencies to consider the effects of proposed undertakings on properties listed or eligible for listing in the National Register of Historic Places.
State Historic Preservation Officer
Official appointed or designated pursuant to the National Historic Preservation Act, to administer a state’s historic preservation program.
A rehabilitation in which the qualified rehabilitation expenditures (QREs) (over a 24-month period selected by the taxpayer) exceed the greater of $5,000 or the adjusted basis of the building. The adjusted basis is to be calculated as of the first day of the 24-month period.
Wall Retention Requirement
The rehabilitation must retain a significant portion of the building’s original structure. The following three tests must be satisfied in order to meet this requirement:
- At least 75 percent of the external walls must be retained either as external or internal walls;
- At least 50 percent of the external walls must be retained as external walls;
- At least 75 percent of the internal structural framework must be retained.