Revenue Code 191 and the Historic Tax Credit Replacement

Section 191 of the Internal Revenue Code originally provided a tax incentive for rehabilitating historic structures, allowing property owners to deduct project costs over a short period. However, this tax law is no longer available to taxpayers. Congress repealed Section 191 as part of the Economic Recovery Tax Act of 1981, eliminating the amortization deduction. In its place, a new system of tax credits was introduced, changing how the federal government incentivizes the preservation of historic buildings. The modern incentives offer a more direct financial benefit for these projects.

The Original Amortization Deduction

The since-repealed Section 191 of the Internal Revenue Code established a tax benefit for owners of historic properties. It permitted taxpayers to amortize, or spread out, their “qualified rehabilitation expenditures” over a 60-month period. This accelerated deduction schedule was a significant incentive, allowing property owners to recover investment costs much faster than through standard depreciation schedules, which could span decades. The goal was to make restoring older buildings more financially appealing.

Qualified expenditures included expenses for structural work, plumbing, and electrical systems but excluded the costs of acquiring the property or any new additions that expanded its total volume. This was a targeted approach to make preserving a historic building a more viable economic decision.

Transition to the Modern Tax Credit

The legislative shift away from Section 191 in 1981 replaced the amortization deduction with an investment tax credit. This new approach is now governed by Section 47 of the Internal Revenue Code. The change altered the nature of the financial incentive to provide a more direct benefit for historic rehabilitation projects.

The Section 191 amortization was a deduction, which reduces a taxpayer’s taxable income. Its value is dependent on the taxpayer’s marginal tax bracket; for instance, a $10,000 deduction for someone in a 30% tax bracket saves $3,000 in taxes. A tax credit, on the other hand, provides a dollar-for-dollar reduction of a taxpayer’s final tax liability. A $10,000 tax credit reduces the amount of tax owed by the full $10,000, regardless of the taxpayer’s income bracket.

A tax credit offers the same monetary benefit to all eligible taxpayers who owe taxes, making it a more direct subsidy for historic preservation. The transition was designed to stimulate private investment in the restoration and reuse of historic buildings.

Qualifying for the Current Historic Tax Credit

To be eligible for the federal historic tax credit under Internal Revenue Code Section 47, a property must first meet criteria related to its historic status. The building must be a “certified historic structure.” This designation is granted by the National Park Service (NPS) and applies to buildings either individually listed on the National Register of Historic Places or certified as contributing to the historic significance of a “registered historic district.” For buildings not yet listed, an owner must pursue this designation.

Beyond the building’s historic status, the project itself must qualify as a “substantial rehabilitation.” This is a financial test where the project’s “qualified rehabilitation expenditures” (QREs) within a 24-month period must exceed the greater of $5,000 or the “adjusted basis” of the building. The adjusted basis is the purchase price, plus capital improvements, minus any depreciation taken. For example, if a building has an adjusted basis of $400,000, the rehabilitation costs must exceed $400,000 to qualify.

Finally, the costs themselves must be “Qualified Rehabilitation Expenditures.” These are the costs associated with the physical work on the building’s structure, such as walls, floors, roofs, and electrical wiring. Costs that do not qualify include the price of acquiring the property, expenses for new additions that expand the building’s footprint, landscaping, or site work. The credit is calculated as 20% of these QREs.

Claiming the Historic Tax Credit

The first formal step is to secure certification from the National Park Service (NPS), a process that runs concurrently with the rehabilitation work. This is managed through a three-part application, Form 10-168, which is submitted to the State Historic Preservation Office (SHPO) for review before being forwarded to the NPS. Part 1 of the application confirms the building’s status as a certified historic structure. Part 2 details the proposed rehabilitation work, which the NPS must certify as being consistent with the Secretary of the Interior’s Standards for Rehabilitation. Part 3 is filed after project completion to request final certification.

After the NPS has certified the rehabilitation, the financial benefit is claimed through the federal tax return. Taxpayers must complete and attach IRS Form 3468, Investment Credit, to their return for the year the rehabilitated building is “placed in service.” The credit is 20% of the certified Qualified Rehabilitation Expenditures and is claimed ratably over a five-year period, meaning one-fifth of the total credit is applied against tax liability each year.

The property owner must maintain ownership and the building must be used for income-producing purposes for the full five-year period after the rehabilitation is complete. If the property is sold or its use changes within this timeframe, the IRS may “recapture” or take back a portion of the credit claimed. This requirement aligns the tax incentive with long-term preservation goals.