What does the dip in Historic Tax Credit mean?
Reading the National Park Leaves
In the National Park Service’s latest report on the Historic Tax Credit, approvals for FY 2024 were down significantly from prior years. The last time we saw approvals this low was in 2014. In addition to this report, the federal Historic Tax Credit was snubbed in the budget bill. While a pending bill would improve the credit, not being included in the budget bill hurts its chances of being passed. While neither of these items is welcome news, there are some bright spots for the credit.
Photo by Mert Bozoglu on Unsplash.
About the HTC
The Rehabilitation Tax Credit, also called the Historic Tax Credit, is a tax credit for renovating and restoring historic buildings in your community. This credit is available at the Federal level and often at the state level, with 39 states offering some form of a historic tax credit.
At the federal level, restoration and rehabilitation activities on historic structures are eligible for a 20% tax credit on certain expenses. To qualify for the credit, the rehabilitated structure has to be listed in the National Register of Historic Places, listed as contributing to the National Register, or located in a state or locally certified historic district. Project approval is determined through the relevant State Historic Preservation Office in conjunction with the National Park Service.
The application is a three-step process. All sections are first submitted to the State Historic Preservation Office, which reviews them for accuracy and completeness and recommends them to the National Park Service. Part 1 of the application focuses on the building and its significance. This is when it is determined whether the building qualifies as a historic structure. Part 2 focuses on rehabilitation activities that utilize the Secretary of the Interior’s Standards for Rehabilitation. This section will determine whether the plans are eligible. Part 3 is submitted after the work is complete and certifies that the project was completed as described.
NPS’s Report
As mentioned above, the number of approved applications through Part 3 dropped significantly in 2024. From 2016 through 2021, the number of approved applications averaged 1,030 annually. However, 2022, 2023, and 2024 averaged 893, with 2024 being the lowest year, at 853. Now, one can infer why the number of applications has decreased significantly since 2022, as new developments stalled during the COVID-19 pandemic, and commercial real estate is still adjusting to the shift towards remote work.
But, it is not all bad news. Looking at the same periods, the average estimated rehabilitation costs from 2016 to 2021 were $6.34 billion, but jumped to $7.17 billion in the last three years. Now, the previous three years are buoyed by a very high investment ($8.81B) in 2023, but even excluding that year, the average investment for 2022 and 2024 remains at $6.35B, showing that while the number of projects has dropped, the average project is larger.
The median project size has remained consistent at $1.3M in qualified rehabilitation expenses. Additionally, 15% of the approved projects required nominations for the property to be included in the National Register.
Proposed changes to the HTC
Earlier this year, bipartisan bills were introduced in the House and Senate that would have expanded the HTC. Both bills would have reverted to a 1-year credit period from the current 5-year period. Additionally, it would have increased the credit percentage from 20% to 30%. It would have also eliminated the basis-adjustment requirement and lowered the substantial rehabilitation threshold. Each of these changes would have increased the return on investment, usability, or access to the credit.
However, like most single-item tax bills, this one has not moved past committee and is unlikely to do so. The best chance of being passed is to become attached to a larger bill, say the budget bill. Unfortunately, the HTC bill did not make it into the version that passed the House. While there is a chance it could be injected during the Senate’s review, this would be another expense that has to be offset. There is a chance it could become associated with something like an extenders package that is still hoped for by the end of the year. However, unlike the Work Opportunity Tax Credit or the Federal Empowerment Zone credit, the HTC is permanent and is not reliant on renewal, making the matter less urgent for Congress.
What does it all mean
Time will tell if the reported dip in applications is temporary or a sign of a larger problem with either the economy or the credit program. For now, developers are left with the current credit program, which is permanent and not in danger of being repealed. We may still see the proposed changes to the program picked up later this year, and that would undoubtedly help spur more interest in the program.
Wrap-up
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The content of this article is for informational purposes only and should not be taken as tax, legal, benefits, financial, or HR advice. I am a lawyer, but receiving this newsletter does not mean I am your lawyer. Since rules and regulations change over time and can vary by location, consult a lawyer or HR expert for specific guidance.