Legislative Chronology of the Federal Rehabilitation Tax Credit
Congresses come and go, and as a result, legislation changes over time. The following timeline traces the evolution of federal-level tax incentives for the rehabilitation of older and historic buildings.
Step One in Creating a Federal Tax Incentive
The National Trust for Historic Preservation began reviewing its own programs, particularly as they related to the environmental movement. An internal report recommended the formation of a taxation policy that addressed the fact that accelerated depreciation rules encouraged property owners and developers to tear down old buildings in favor of new construction to quickly recoup investment dollars. The National Trust's board subsequently asked the Nixon Administration's Justice Department to draft a law addressing this problem. Legislation was introduced in two Congresses, but ultimately went nowhere.
The Tax Reform Act of 1976 (P.L. 94-455)
This legislation enacted two significant provisions intended to encourage the renovation, restoration, and protection of historic buildings on the National Register of Historic Places or in locally-designated historic districts.
- It allowed owners of historic buildings used in a trade or business or for the production of income to "amortize" or write off their rehabilitation expenditures over a period of 60 months. This was a major change from previous tax laws that allowed the owner to write off rehab expenditures over the life of the improvements, typically from ten to 20 years or more, depending on the scope of the renovation
- The second incentive was an alternative to five-year amortization. The owner of a qualifying historic building who performed "substantial rehabilitation" on that building could choose to use the same form of depreciation available to the owner or developer of a new construction project of similar type. For example, a developer renovating an apartment building in a qualifying historic district could choose to use a 200% declining balance form of depreciation rather than the straight-line or 125% declining balance rates otherwise available to the owners of used residential buildings. Owners of historic commercial buildings could choose to use the 150% declining balance depreciation rate normally available only to developers constructing new commercial buildings.
The Revenue Act of 1978 (P.L. 95-600)
This legislation created additional incentives for the renovation and restoration of historic buildings, and tax rules governing investment tax credits were modified so that more kinds of real estate rehab projects qualified.
- Rehabilitation expenditures made after October 31, 1978, on commercial buildings that had been in use for at least 20 years became eligible for a 10% investment tax credit. Residential buildings did not qualify, but office buildings, hotels, factories, and other types of commercial properties did.
- Costs for exterior, as well as interior, renovation could be included. However, at least 75% of the exterior walls had to be retained, and no new additions or new construction associated with the project could be included among the expenditures that qualified for the 10% credit.
- There were also limitations on combining the investment tax credit with the historic incentives provided in 1976. The Revenue Act of 1978 specifically prohibited combined use of the five-year amortization and the investment tax credit on qualifying historic structures; it did permit use of accelerated depreciation, however.
The Economic Recovery Tax Act of 1981 (P.L. 97-43)
This legislation created a three-tier investment tax credit for qualified rehabilitation expenditures, including:
- 15% for non-residential buildings at least 30 years old.
- 20% for non-residential buildings at least 40 years old.
- 25% for certified historic structures (including residential buildings).
The Tax Reform Act of 1986 (P.L. 99-514)
This legislation replaced the three-tier credit with a two-tier credit for qualified rehabilitation expenditures, including:
- 20% for certified historic structures.
- 10% for non-certified structures originally placed in service before 1936.
Administering the Federal Rehabilitation Tax Credit
With support from the National Trust, the National Park System Advisory Board made recommendations for improving the administration of the federal rehabilitation tax credit program. These made it more user-friendly and to clarified the process for using the credit more effectively.
The Housing Recovery Act of 2008 (P.L. 110-289)
President George W. Bush signs the Housing and Economic Recovery Act of 2008 into law, which included three amendments to the federal rehabilitation tax credit. The net effect of these provisions created a much greater incentive for using the federal rehabilitation credit in the context of affordable housing while simultaneously providing relief from the alternative minimum tax (AMT). The three provisions affecting the rehabilitation tax credit include:
- Leaseback for Not-For-Profits: Under current law, taxpayers were ineligible for the full amount of the rehabilitation credit if more than 35% of a rehabilitated building was leased to a state or local government. In such a situation, expenditures that are allocable to the portion of the building that was leased by the government could not be counted in calculating the rehabilitation credit. Under the new law, taxpayers could qualify for the full amount of the rehabilitation credit so long as less than 50% of the rehabilitated building was leased to state and local governments or other tax-exempt entities.
- AMT Relief for Rehab Projects Twinned with the Low-Income Housing Credit: The AMT can increase the cost of implementing housing programs. Under current law, interest on tax-exempt housing bonds was subject to the AMT, and both low-income housing tax credits and rehabilitation tax credits could not be taken against the AMT. This limited the marketability of these bonds and the incentive effect of these credits. The new bill allowed the low-income housing tax credit and the rehabilitation tax credit to be used to offset the AMT, and ensured that interest on tax-exempt housing bonds was not subject to the AMT.
- Including Historic Rehabilitation Under State Qualified Allocation Plans Criteria: This provision gave state housing agencies greater flexibility to select sites for low-income housing projects and to allocate adequate amounts of credit for projects. It also included historic rehabilitation as one of the twelve criteria under state qualified allocation plans.
Reintroducing the Community Restoration and Revitalization Act
Senators Blanche Lincoln (D-AR) and Olympia Snowe (R-ME), along with Representatives Allyson Schwartz (D-PA) and Pat Tiberi (R-OH), work to reintroduce the Community Restoration and Revitalization Act, a bill that would make beneficial changes to the rehabilitation tax credit and provide a greater incentive for the reuse of older and historic buildings. It would also encourage building owners to achieve substantial energy savings in building rehabilitations with graduated increases in the historic tax credit based on the level of efficiency achieved.
