Tax Reform’s Impact on Rehabilitation Credits

One real estate issue that the 2017 Tax Cuts and Jobs Act will significantly impact is the rehabilitation credit. In cities that have a large population of older buildings and designated historic districts (New York, Boston, Philadelphia, etc.), rehabilitation credits help incentivize expenditures on older buildings. This benefit for owners and developers serves to help preserve these buildings while they undergo updates for continuous use as part of a vibrant community.  

Prior to the recent tax reform legislation, you could take a 20% credit for qualified rehabilitation expenditures to a certified historic structure, along with a 10% credit for qualified rehabilitation expenditures to a qualified rehabilitated building (not certified as historic, but pre-1936, referred to as the “the old building credit”).

Any building listed in the National Register of Historic Places as landmarked or located in a registered historic district qualifies as “certified historic.” A qualified rehabilitated building generally means a building placed in service before 1936 with U.S. Department of the Interior approval for the rehabilitation.

The Act repeals the 10% credit for older buildings but retains the 20% credit for historic structures. There is also an additional provision that the credit be taken ratably over a five-year period at 20% of the credit per year. The effective date is for amounts paid or incurred after December 31, 2017, and a transition rule applies.

How will this impact rehabilitation plans for older buildings without the historic designation? The changing rules certainly provide less of a tax incentive. When you consider the reduction of the corporate tax rate to 21% and take into account the loss of the 10% credit for qualified rehabilitation projects, there may be a significant reduction in the number of such projects going forward. New York State, however, provides a generous benefit on income tax that may still make restoring historic structures a better alternative.

Developers and owners should account for the changes to rehabilitation credits as they plan projects and consider the future of older properties.