Rehabilitation Investment Tax Credit


Rehabilitation Investment Tax Credit Recognizing the need to preserve America’s aging cities; Congress enacted the Rehabilitation Investment Tax Credit (RITC) as part of the Revenue Act of 1978. The amount of the tax credit was increased with the passage of the Economic Recovery Act of 1986. When the tax code was overhauled with the passage of the Tax Reform Act of 1986, the credit was modified and reduced to the two-tier credit that is currently used. As a result, the RITC is one of the few remaining federal tax credits that can assist with the rehabilitation of older buildings within our historic urban cities and various industrial sites.

 

The use of the RITC effectively reduces the costs of rehabilitation to an owner of an income producing, historic property. This tax credit is also available to owners and certain long term lessors of income-producing properties.

 

There are two credits – 20% for historic buildings and 10% for nonhistoric buildings (built before 1936), with different qualifying criteria for each credit. The actual credit is based upon a percentage (20 or 10) of qualified rehabilitation costs.

 

Qualifications for the 20% Tax Credit:

  • The building must be listed on the National Register, either individually or as a contributing building within a historic district.  

 

  • Building must be used for income producing purposes.  

 

  • Rehabilitation work itself must be undertaken according to the Secretary of the Interior’s Standards for Rehabilitation.

 

  • The project must meet the "substantial rehabilitation test": the amount of money to be spent on the rehabilitation must be greater than the adjusted basis of the building or $5,000, whichever is more. Generally, projects must be finished within a 24-month period.

 

  • After rehabilitation, the building must be owned by the same owner and operated as an income producing property for 5 years.

There is a three-part application for the 20% credit. The application process takes approximately 90 days from submittal to approval. The applications are submitted to the State Historic Preservation Office (SHPO). They review the application, make comments, and forward the application to the National Park Service, who has final review authority.

  • Part 1 documents the building as a certified historic structure that is eligible to receive the tax credit. Buildings that are individually listed are automatically designated as certified historic structures.

 

  • Part 2 explains the scope of the rehabilitation work and should be filed before work begins. To supplement the application, plans and photographs are also submitted with the application.

 

  • Request for Certification of Completed Work (Part 3) documents the completed work and is proof (for the IRS) that the rehabilitation is "certified".  

Qualifications for the 10% Tax Credit:

  • The building must be built before 1936 and be nonhistoric. It must not be listed on the National Register of Historic Places, either individually or as a contributing building within a district.  

 

  • Building cannot be used for rental residential purposes.

 

  • A building must meet the Wall Retention Requirement, retaining 50% to 75% of the external walls and retain 75% of the internal structural framework.

 

  • The project must meet the "substantial rehabilitation test," where the amount of money to be spent on the rehabilitation is greater that the adjusted basis of the building or at least $5,000, whichever is greater. Generally, the project must be finished within a 24-month period.

 

  • After rehabilitation, the building must be owned by the same owner and operated as an income producing property for 5 years.

Rehabilitation work for the 10% credit is not subject to review by any state of federal agency.

 

The RITC credit is based upon a percentage of the eligible rehabilitation costs.

 

Qualified, eligible expenses include:

  • Construction costs • Interim Financing – loan fees and interest
  • Property taxes and insurance during construction
  • Architectural, engineering and design fees
  • Builder, contractor, developer fees
  • Appraisal fees

Ineligible expenses include:

  • Building acquisition
  • Intangible assets – reserves, permanent loan fees, marketing
  • Site work – parking lots, sidewalks, and landscaping
  • Any additions that are outside the envelope of the historic building