Understanding Real Estate Tax Credits: Historic and Low-Income Property Benefits
Written By Julie Eddy, Strategist at BEC CFO & CPA
Understanding Real Estate Tax Credits: Historic and Low-Income Property Benefits
Real estate tax credits offer substantial financial benefits and incentives for property owners and developers, promoting both historic preservation and the expansion of affordable housing. Among these credits, the Historic Rehabilitation Tax Credit and the Low-Income Housing Tax Credit stand out as key tools in enhancing community heritage and providing affordable rental
options. Here’s a simple guide on how to apply for and take advantage of these valuable credits.
Historic Rehabilitation Tax Credits
1. Purpose and Benefits
Historic Rehabilitation Tax Credits are designed to encourage the preservation and restoration of historic buildings. By offering financial incentives, these credits help maintain the architectural and cultural heritage of communities.
2. Types of Credits
Federal Historic Tax Credit (HTC): Provides a 20% credit for the rehabilitation of certified historic structures. This applies to buildings listed on the National Register of Historic Places or contributing to a historic district.
State Historic Tax Credits: Many states offer additional credits which can be combined with the federal credit. The rates and eligibility criteria vary by state.
3. Eligibility Criteria
Historic Designation: The property must be either listed on the National Register of Historic Places or contribute to a historic district.
Substantial Rehabilitation: The renovation must be significant, generally involving at least $5,000 in qualified expenditures or meeting a percentage of the building’s adjusted basis.
Qualified Expenditures: Only certain types of spending count towards the credit, including costs for labor and materials directly related to the preservation of the property.
4. Application Process
Pre-Approval: Before starting any work, submit a Part 1 application to the State Historic Preservation Office (SHPO) to determine if the property qualifies as historic.
Rehabilitation Plan: Submit a Part 2 application detailing the planned work. This plan must comply with the Secretary of the Interior’s Standards for Rehabilitation.
Final Certification: After completing the rehabilitation, submit a Part 3 application with documentation of the work done to receive final approval and the tax credit.
5. Documentation and Compliance
Detailed Records: Maintain thorough records of all expenditures and project documentation.
Compliance with Standards: Ensure that all work adheres to historic preservation standards to qualify for the credit
Low-Income Housing Tax Credits (LIHTC)
1. Purpose and Benefits
The Low-Income Housing Tax Credit (LIHTC) program aims to incentivize the development and rehabilitation of affordable rental housing. It is a crucial tool for increasing the supply of affordable housing in communities across the country.
2. Types of Credits
9% Credit: Often used for new construction or substantial rehabilitation projects. This credit provides a larger benefit but is typically allocated through a competitive process.
4% Credit: Generally used for projects involving the acquisition of existing buildings or smaller rehabilitation projects. It is available in conjunction with tax-exempt bond financing.
3. Eligibility Criteria
Income Requirements: At least 20% of the units must be set aside for tenants whose income is 50% or less of the area median income (AMI), or at least 40% of the units must be for tenants at 60% of AMI.
Compliance Period: Properties must adhere to income and rent restrictions for a minimum of 15 years, with a potential extension of another 15 years.
4. Application Process
Application Submission: Apply through your state’s housing finance agency (HFA) or a similar authority that administers the LIHTC program.
Project Approval: The application must include detailed project plans, financial projections, and a commitment to meet affordability requirements.
Monitoring and Compliance: Once awarded, the project is subject to regular compliance checks to ensure that it continues to meet affordability criteria.
5. Documentation and Reporting
Ongoing Reporting: Maintain and report tenant income and rent levels to the administering agency.
Compliance Records: Keep detailed records of income calculations, tenant leases, and other compliance-related documents.
Conclusion
Real estate tax credits for historic rehabilitation and low-income housing are valuable tools for property owners and developers. By understanding the eligibility criteria, application processes, and documentation requirements, you can effectively leverage these credits to support preservation efforts and increase affordable housing availability. Whether you’re restoring a historic landmark or developing a new affordable housing project, these credits offer significant financial incentives to help achieve your goals.