Rehabilitation Tax Credit: How to Qualify and Claim It

The Rehabilitation Tax Credit is a federal tax incentive encouraging private investment in restoring historic buildings, promoting both preservation and economic revitalization. This credit is available for the substantial rehabilitation of certified historic buildings, with the amount based on the building’s classification and the nature of the work.

Qualifying for the Credit

A 20% credit is offered for rehabilitating a “certified historic structure.” A building qualifies if it is listed in the National Register of Historic Places or is located in a registered historic district and certified by the National Park Service (NPS) as contributing to that district’s significance. To qualify, the building must also be depreciable, meaning it is used in a trade or business or held for the production of income.

A requirement for the credit is meeting the “substantial rehabilitation test.” To meet this test, rehabilitation expenditures during a 24-month period chosen by the taxpayer must exceed the greater of $5,000 or the building’s adjusted basis. The adjusted basis is the original cost of the building, plus the cost of any capital improvements, minus any depreciation taken.

For example, if a building was purchased for $200,000 (with $150,000 allocated to the building) and the owner has claimed $30,000 in depreciation, the adjusted basis is $120,000. The owner would need to spend more than $120,000 on qualified rehabilitation work within a 24-month timeframe. For certain multiphase projects, this measurement period can be extended to 60 months.

Calculating the Credit Amount

The credit is calculated as a percentage of the “Qualified Rehabilitation Expenditures” (QREs). QREs are the specific costs directly associated with the physical work of repairing or altering the building. These costs must be chargeable to a capital account for depreciable property.

Examples of QREs include expenses for:

• Structural work
• Plumbing and electrical systems
• Roofing
• Interior walls and floors
• Architectural or engineering fees

For the 20% credit, the work must be consistent with the Secretary of the Interior’s Standards for Rehabilitation. Certain costs are excluded from QREs, including the property’s acquisition cost, new additions that expand the building’s volume, and site work like landscaping or parking lots. Expenses for personal property, such as furniture or appliances, are also not considered QREs.

If a project on a certified historic structure incurs $500,000 in total QREs, the available tax credit would be $100,000 (20% of $500,000). This credit must be claimed ratably over a five-year period beginning in the year the building is placed in service, resulting in a $20,000 credit per year for five years.

Required Information and Application Forms

Claiming the credit requires completing the three-part Historic Preservation Certification Application (NPS Form 10-168). Each part must be approved by the National Park Service (NPS).

Part 1, the Evaluation of Significance, establishes that the building is a “certified historic structure.” It requires documentation of the building’s location, features, and historical background to demonstrate its eligibility.

Part 2, the Description of Rehabilitation, details the proposed work. Applicants must provide a description of planned alterations, supported by drawings and photographs, to show the project respects the building’s historic character.

Part 3, the Request for Certification of Completed Work, is submitted after the project is finished. This part documents the completed project and requests final certification from the NPS, which is necessary for claiming the tax credit.

In parallel with the NPS application, taxpayers use IRS Form 3468, Investment Credit, to claim the credit on their federal tax return. This form requires the total QREs, the date the property was placed in service, and the NPS project number. The basis of the property must be reduced by the amount of the credit claimed.

Submitting Applications and Claiming the Credit

The completed application forms (Parts 1 and 2) are not sent directly to the National Park Service. Instead, they must first be submitted to the State Historic Preservation Office (SHPO) in the state where the property is located.

The SHPO conducts an initial review of the application, which takes around 30 days. After this, the SHPO provides its recommendation and forwards the application to the NPS for a final decision. The NPS then conducts its own review, which also takes approximately 30 days.

Once the rehabilitation work is complete, the applicant submits Part 3 of the application to the SHPO, which again forwards it to the NPS for final certification. After receiving the final NPS certification and placing the building in service, the taxpayer can claim the credit using IRS Form 3468.

Post-Claiming Considerations

After claiming the credit, owners are subject to a recapture rule. This rule is designed to prevent a quick sale of the property after receiving the tax incentive. If the property is sold or disposed of within five years of being placed in service, a portion or all of the credit must be repaid to the IRS.

The recapture amount decreases by 20% for each full year that passes. The percentage of the credit recaptured is:

• 100% if sold within the first year
• 80% if sold during the second year
• 60% in the third year
• 40% in the fourth year
• 20% in the fifth year

After five full years, the recapture period ends, and the property can be sold without penalty. The property’s basis, which was reduced when the credit was taken, is increased by the amount of any credit that is recaptured.