Summary of Historic Rehabilitation Tax Credit Bill Available

The National Trust for Historic Preservation has long recognized the links between historic preservation, community revitalization, and housing. In many parts of the country where large numbers of abandoned buildings are located in some of the nation's most disinvested communities, there is a need for incentives to create market-rate housing for stabilizing neighborhoods and for developers to create affordable housing in certain urban and rural areas. Additionally, vacant underutilized historic structures that were not built for housing -- but no longer serve their intended purpose, such as warehouses, factories, mills, and department stores -- can be adaptively re-used as places to live. Many of these historic and older buildings are located near existing infrastructure, transportation hubs, schools, and neighborhood-serving retail. About 60 percent of the nation's 12,300 National Register historic districts -- comprising over 1.1 million contributing buildings -- overlap census tracts where the poverty rate exceeds 20 percent. Last year the rehab credit created over 15,000 units of housing and 40 percent of those units were in the affordable range -- particularly when developed in conjunction with the Low-Income Housing Tax Credit.

Although the rehab credit has been widely used as an effective tool for transforming vacant and abandoned buildings into safe, decent, and -- in many cases -- affordable places to live, it must be improved so that it can truly realize its full potential. The rehab credit should be easier to use, especially in projects that twin the incentive with the Low-Income Housing Tax Credit (LIHTC) and for smaller, more main street-oriented projects. The National Trust has worked with housing experts and historic preservationists around the country to develop the following proposed amendments to the rehab credit to enhance its applicability for housing and community revitalization.

Summary of Amendments:

• Basis Reduction-- Sections 2 and 3 of the Act would address the current disincentive to using the Historic Rehabilitation Tax Credit (rehab credit) that lowers tax benefits dollar-for-dollar according to the amount of credit in projects that use the rehab credit. This is particularly problematic when the rehab credit is combined as an incentive along with the Low-Income Housing Tax Credit (LIHTC). Section 2 would amend Section 42 of the Code pertaining to the LIHTC to increase by 125 percent the applicable percentage used to calculate LIHTCs for buildings eligible for both LIHTCs and the rehab credit. The effect of this change is to restore dollar-for-dollar the LIHTCs that otherwise would be lost by reason of the rehab credit basis adjustment requirement under Section 50(c) of the Code. Section 3 would amend Section 50 of the Code to reduce the basis reduction required for property subject to the rehab credit from 100 percent of rehab credit earned to 50 percent of rehab credit earned. This better conforms to other tax credits such as those for energy and reforestation.

• Smaller Projects-- Section 4 of the Act would amend Section 47 of the Code pertaining to the rehab credit to increase the rehab credit rate from 20 percent to 40 percent for smaller projects in which the qualified rehabilitation expenditures do not exceed $2 million. This would target the incentive to those "main street" type developments in which rehab credit costs are currently too prohibitive

• More Housing-- Section 5 of the Act would amend Section 50 of the Code to permit the 10 percent portion of the Historic Tax Credit allowed under Section 47 in connection with the rehabilitation of older, "non-historic" buildings to be claimed with respect to residential rental property. It is currently prohibited for projects that include dwellings.

• Re-Using "Older Buildings"-- Section 6 of the Act would change the definition of "older building" from "built before 1936" to any property "fifty years old or older" by amending Section 47 to "index" the date by which a building must first have been placed in service in order to be eligible for the 10 percent portion of the rehab credit.

• Non-Profit Uses-- Section 7 of the Act would ease the rules governing non-profit deals so that more community-oriented projects may move forward by amending Section 47 to limit the types of leasing arrangements with non-profits and other tax-exempt entities that preclude the use of rehab credits.

• Targeting in Disinvested Areas-- Section 8 of the Act would boost by 130 percent the qualified rehabilitation expenditures on which the rehab credit can be claimed for buildings located in certain disinvested neighborhoods, difficult to develop areas, and census tracts where the poverty rate is particularly high.

• Application to Condominiums -- Section 9 of the Act would broaden the tax credit's use to condominium developments and in so doing, provide new support for the revitalization of urban neighborhoods nationwide. The bill's provision removes a recapture clause -- requiring the payback of tax credits upon conversion of a tax credit property into a condo development. This clause has significantly limited the credit's use.