Historic tax credit

The historic tax credit rewards the rehabilitation of buildings that are listed on, or contribute to a district on, the national historic register. The owner receives a credit against federal income tax equal to a percentage of qualified rehabilitation expenses, provided the work meets preservation standards reviewed by the state historic preservation office and the National Park Service. Many states add a parallel credit of their own.

Developers rarely have enough tax liability to use the credits themselves, so they bring in an investor who contributes equity in exchange for the credits, much as with the Low-Income Housing Tax Credit. That equity reduces the amount the project must raise from conventional sources, and because it is compensated by tax savings rather than by a share of cash flow, it lowers the net operating income the building must produce.

The credit exists because historic rehabilitation is usually more expensive than new construction of the same space. Old structures require selective demolition, structural reinforcement, hazardous material abatement, and custom work to preserve character-defining features, and preservation standards limit the changes that can be made. Without the credit, many of these buildings would sit vacant or be demolished. With it, they can become housing, though at a cost per unit that is often higher than a new building and with a public subsidy that is not visible in the rent. The credit can be combined with opportunity zone investment and with affordable housing credits, subject to complex rules about how the sources interact.