Program Brief: The Federal Historic Preservation Tax Incentive Program allows an owner of a historic property to donate a facade conservation easement on the exterior of his or her property to a qualified charitable organization and claim a tax deduction for this contribution. This tax deduction must be based on a qualified, independent appraisal. This is deducted from the owner’s federal income tax and, in many cases, applies to the owner’s state and local income taxes as well.

Tax Code: IRC Section 170(h)

Tax Regulations: Section 1.170A-14

Tax Form: IRS Form 8283

Qualification: The property must contribute to a historic district or be an individual landmark on the National Register of Historic Places.

Tax Treatment: The donation of a facade conservation easement is treated from a tax perspective as any other non-cash charitable contribution. When basing the deduction on the appreciated value of the property, an individual may claim in any one year an amount of up to 30% of his or her adjusted gross income.

The taxpayer can elect to base the contribution on the cost basis of the property using the original purchase price, and must do so if making the donation within one year of its purchase. In this circumstance, the taxpayer may deduct an amount of up to 50% of his or her adjusted gross income.

Where the owner of the income-producing property is a flow through entity (i.e. partnership, LLC, S corporation) the tax attributes pass through to the individual partners or shareholders. Corporations that file Form 1120 (C corporations) are limited to a charitable deduction of 10% of the corporation’s taxable income prior to the deduction.

In all cases, any excess deduction can be carried over five additional years.

Cash Contribution: A cash contribution is usually made with the easement donation. The combined cash and non-cash charitable contributions can be deducted in an amount of up to 50% of the taxpayer’s adjusted gross income with the additional five year carry over of the excess.

Applicable Income: These deductions may be applied against active as well as passive income, ordinary income or long-term capital gains. For all charitable contributions, the taxpayer must deduct the highest amount possible, per IRS regulations, in the first year and each subsequent year until the entire deduction is used.

Associated Fees: Cash payments for bank subordination and appraisal fees associated with making a facade conservation easement are considered business expenses.

Alternative Minimum Tax: These charitable donations are fully deductible for alternative minimum tax.

Effect on Basis: The basis of the property is decreased by the percentage attributed to the easement value; however the donation will never cause the basis to go below zero.

Combining Benefits: Tax benefits provided by the Historic Preservation Tax Incentive and the Rehabilitation Tax Credit may be combined.

Syndication: Corporations or other taxable entities may invest in the property to obtain the benefits of the deduction to offset income tax. This practice is referred to as syndication. It is important to note that if a developer wishes to pursue this option, the syndicated investment must occur prior to the easement being granted (and prior to the building being placed in service, if both the easement donation and tax credit benefits are syndicated). Typically, syndication will generate a cash payment from the investor of 70% to 95% of the expected tax benefits.

Prepared by: David Duren, CPA, Tate & Tryon, Washington, DC. Summarized from: A Tax Professional’s Guide to Historic Preservation Incentives for Owners of Income-Producing Property.

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Program Brief: The Federal Rehabilitation Tax Credit for Certified Historic Structures authorizes a tax credit equal to 20% of the qualified rehabilitation expenditures (“QRE”) incurred during the rehabilitation of a historic property. The credit is based on actual QREs incurred. To qualify, the total QREs must exceed the greater of $5,000 or the adjusted basis of the property. The credit is a “one-time” credit taken in the tax year that the property is placed in service.

A building is “placed in service” when it is “first placed in a condition or state of readiness and availability for its specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity.” Reg. Sec. 1.167(a)-11(e)(1)(i). Also, when an owner acquires a property from a seller who has done a rehabilitation, the new owner may take the credit for these expenditures (which the new owner is indirectly paying for) as long as the rehabilitated property has not yet been placed in service.

Tax Code: IRC Section 47

Tax Regulations: Section 1.48-12

Tax Form: IRS Form 3468

Qualification: The property must be incomeproducing and must contribute to a historic district or be an individual landmark on the National Register of Historic Places.

Tax Treatment: The Rehabilitation Tax Credit is reported in full on the first year’s tax return. As a practical matter, a taxpayer may be unable to take the full credit in the first year due to some limitations. First, the amount of credit that can be taken in any one year is limited to the amount of the taxpayer’s tax liability for that year. Second, the credit is indirectly subject to the alternative minimum tax because the taxpayer cannot take a credit that is greater than the excess of the regular tax over the minimum tax (see IRS Form 3468 “Investment Credit”).

Where either of these limitations applies, the taxpayer may carry back any excess credit to one previous tax year or carry forward any excess credit for the next 20 years.

Recapture applies if a property is sold or disposed of within a five-year period of taking the tax credit. “Recapture” is the tax code requirement to repay all or part of a tax credit taken in a previous year. If the taxpayer sells the property within five full succeeding years (five 365-day periods) from the date the rehabilitated property was placed in service, then he or she is subject to recapture. The amount of recapture is equal to the entire tax credit if the property is disposed in the same year as it is placed in service, and decreases by 20% every year thereafter that the taxpayer owns the property. When the five-year period is complete, recapture no longer applies.

When the building is held through a partnership and one of the partners, by sale or other transfer, reduces his or her interest in the partnership to less than two-thirds of what it was in the year the credit was taken, that event is deemed to be a partial disposition, triggering partial recapture.

Recapture is not triggered by the following events: 1) A simple transfer of interest in the property between spouses or a transfer of an interest due to divorce. In these cases, the transferee steps into the shoes of the transferor for purposes of tax credit recapture (see IRC Section 50(a)(c)). 2) A transfer of the property by reason of death (see IRC Section 50(a)(4)). 3) A transfer in certain tax-free liquidations and reorganizations pursuant to IRC Section 381(a) (also see IRC Section 50(a)(4)). 4) A mere change in the form of conducting a trade or business (provided the property is retained in the trade or business as IRC Section 38 property and the taxpayer retains a substantial interest in the trade or business - see IRC Section 50(a)(4)).

Effect on Basis: The tax regulations require that the basis of rehabilitated buildings be reduced by the amount of the rehabilitation tax credit allowed (regardless of whether the credit is used or carried forward ­ see Reg. Sec. 1.48- 12(e)). However, if the rehabilitated property is disposed of or ceases to be business use property within the five-year recapture period as described above, the amount of the recaptured credit is added back to the building’s basis.

Combining Benefits: Tax benefits provided by the Historic Preservation Tax Incentive and the Rehabilitation Tax Credit may be combined.

Syndication: Corporations or other taxable entities may invest in the project to obtain the benefits of the credit to offset income tax. This practice is referred to as syndication. If a developer wishes to pursue this option, the syndicated investment must occur prior to the building being placed in service (and prior to the easement being granted, if both the tax credit and easement donation benefits are syndicated). Typically, syndication will generate a cash payment from the investor of 70% to 95% of the expected tax benefits.

Prepared by: Karen M. Leonel, Presence Group, Washington, DC. Summarized from: A Tax Professional’s Guide to Historic Preservation Incentives for Owners of Income-Producing Property.