Many of West Virginia’s towns and cities of all sizes are in the midst of a renaissance. Community development efforts abound in many parts of the Mountain State, and historic downtown areas and neighborhoods are at the center of this economic resurgence. Private investors are finding themselves more and more attracted to historic redevelopment projects as a result of a unique financing tool known as the Historic Rehabilitation Tax Credit, or HTC.
A tax credit is an amount of money that can be offset against a tax liability and is therefore subject to stipulations. According to the IRS, any taxpayer that owns an interest in an approved building rehabilitation project is eligible to claim the HTC. This includes, individuals, corporations, estates and trusts. Additionally, HTCs can be distributed to a corporate investor partner in exchange for additional equity capital that can be used for financing the project. In West Virginia owners of certified historic buildings – meaning those listed on the National Register of Historic Places individually or as a contributing structure in a historic district – can claim a 20% federal HTC and a 25% state HTC for a dollar-for-dollar tax credit of Qualified Rehabilitation Expenses for substantial rehabilitation improvements made to historic buildings. Eligible properties include a multitude of building types including abandoned industrial complexes, vacant schools, dilapidated homes, and old downtown buildings.
For a small business owner or a group of individuals investing in a historic building project together, the example of a hypothetical Mr. Smith might be useful when considering the amount of HTC that can be earned on a potential project. In this scenario, Mr. Smith is considering investing in a two-story mixed-used commercial building in downtown Parkersburg. Mr. Smith plans to redo the interior for a brand new first floor hair salon with two apartments on the second floor. He plans to spend $500,000 to install a new roof, repair rotten windows, rebuild the severely deteriorated interior, lay new flooring, and rewire the building, all of which will qualify as expenditures eligible for the HTC. If he completes the application process and receives certification from the National Park Service that the rehabilitation meets the Secretary of the Interior’s Standards for Rehabilitation, Mr. Smith will be eligible for a cumulative 45% credit on the cost of his rehabilitation for a total of $225,000 in tax credits. If he cannot utilize the full amount of the State Tax Credit in the first year, he can spread out the use of the credit over a ten-year period. For the Federal Tax Credit, Mr. Smith cannot claim the full amount of credits in one year; they must be claimed at the rate of 20% per year for 5 years.
How do I find out if my project qualifies?
The HTC process is broken up into three parts that require review and approval from the West Virginia State Historic Preservation Office (WVSHPO) and the federal agency that manages the HTC, the National Park Service (NPS). Before you start the application process, it is recommended that you contact that the WVSHPO to discuss your project. Their number is (304)558-0240, and they have a Historic Tax Credit Coordinator on staff who will work with you throughout the application and certification process.
During the conversation with the WVSHPO staff, you will discuss your proposed building project because the credit is based on approval of a specific capital investment in the building. All work in your proposed tax credit project must meet specific guidelines called the Secretary of the Interior’s Standards for Rehabilitation. We are not going to dive into what those are specifically, but it is important to understand that the work you are proposing must maintain certain historical architectural features of the building. The staff at the WVSHPO and NPS will help you to determine what features must be preserved as you seek their approval for your HTC project, which could include anything from roof, chimney, and foundation work to updates and changes to essential, fixed equipment necessary for mechanical, electrical and plumbing systems. (Here is a list of Qualified Rehabilitation Expenditures (QREs).)
Looking at it from a different perspective, you may be wondering if your project qualifies from a financial aspect. The IRS and the WV State Tax Department require that certain financial conditions be met to qualify for the HTC, and the “substantial rehabilitation test” must be calculated. Passing the substantial rehabilitation test means that your QREs are greater than the building’s adjusted basis for a specific 24- or 60-month rehab period, or are greater than $5000. So, how do you calculate the adjusted basis to see which is more and if you qualify?
Adjusted Basis = Purchase price of the property – The cost of the land at the time of purchase – Depreciation taken since the purchase date of the property + The cost of any capital improvements made since purchase
Back to the earlier scenario about Mr. Smith to see how he qualified for the HTC:
Mr. Smith purchased the building in downtown Parkersburg for $225,000, and of that purchase price, $100,000 was attributed to the cost of the land. Over the years, he has depreciated the building for tax purposes by a total of $20,000. He recently stabilized portions of the building at a cost of $15,000. Mr. Smith’s adjusted basis is $120,000 (or 225,000 — 100,000 — 20,000 + 15,000). Mr. Smith will have to spend over $120,000 in improvements to the building over a 24 or 60-month period to qualify for the HTC. Since he was planning to spend $500,000 for his HTC project over a two-year period, we know that his project qualifies for the HTC from that standpoint. The adjusted basis is used to determine the eligibility of the project and does not determine or affect the amount of tax credits you will receive. The amount of the tax credit is based on the amount of QREs approved for the project.
Historic Tax Credit in Action
While the hypothetical example of Mr. Smith is useful in helping us understand the workings of the Historic Tax Credit, the HTC is making meaningful, authentic change possible in West Virginia communities. To learn more about the HTC in action, you can read about the Golden Rule project in Belington to see how the use of this unique financing tool can play out in real life. The HTC is a multi-faceted financial redevelopment tool that requires thorough project planning and consideration. If implemented properly, it can make old building renovations financially feasible. It is a tool to encourage and attract new private investment in West Virginia and help to rebuild our communities.
The Preservation Alliance of West Virginia is the statewide nonprofit organization dedicated to historic preservation. To learn more, contact the Preservation Alliance of West Virginia by email at firstname.lastname@example.org or call 304-345-6005.
The Preservation Alliance of West Virginia does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should always consult your own tax, legal, and accounting advisors before engaging in any transaction.
About the Author
Danielle Parker is the executive director of the Preservation Alliance of West Virginia. She has completed coursework in Historic Real Estate Finance with the National Development Council, holds a Master’s Degree from West Virginia University in Public History, and earned a Bachelor’s Degree is History from Slippery Rock University.