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Federal Tax Assistance

Consider your community. Are there any National Register Districts or any properties individually listed in the National Register of Historic Places? Did you know that these properties are eligible for the Federal Rehabilitation Tax Credit program? San Marcos did.

In March of this year, the owners of the Old State Bank Building in downtown San Marcos completed its rehabilitation and discovered the benefits of the 20 percent tax credit. Constructed in 1885, the masonry building contributes to the Downtown National Register district, making the rehabilitation project eligible for the 20 percent tax credit program.

With a few calculations and considerations, you can see how the process works and capture the tax credit for the National Register properties in your community.

One of the first considerations was whether or not the bank building was a certified historic structure. If the building were listed individually in the National Register, the automatic answer would have been, "Yes!"

However, because it simply was part of a National Register District, Part One of the application, Evaluation of Significance, was submitted to the Texas Historical Commission (THC) and the National Park Service (NPS), to make certain that it was a contributing structure.

Secondly, it was necessary to consider the intended use of the property. All properties using the 20 percent tax credit must be used for an income-producing purpose for at least five years following rehabilitation.

Plans for the Old State Bank Building were for its use as apartments and retail/office space, so the owners were able to proceed to the next step of the process.

The next step involved a calculation of substantial rehabilitation. Do not let the word calculation intimidate you! This simply means that the qualified expenditures must exceed the pre-rehabilitation value of the building.

The expenditures for facade rehabilitation of the Old State Bank totaled $360,855, which exceeded the total value of the property minus the value of the land, qualifying the project as a substantial rehabilitation.

After evaluating several other items such as physical integrity and any non-historic surface coverings, Step Two of the application, Description of Rehabilitation Work, was completed. All rehabilitation work, both interior and exterior, followed the Secretary of the Interior's Standards and was granted approval. Rehabilitation work was underway!

Upon completion of this approved work, the final part of the application, Request for Certification of Completed Work, was submitted and approved, qualifying the owner for a dollar-for-dollar federal tax reduction of $72,171 (20 percent of the qualified rehabilitation expenditures). The owner verified that no IRS restrictions applied, and tax credits were available beginning the year that the building was placed in service.

Calculation of Tax Reduction

$360,855 (Qualified Expenditures)
X       .20 (20% tax credit)
$ 72,171 (Available Tax Reduction)

This federal tax credit program, begun in 1976, is one of the government's most successful and cost-effective community revitalization programs.

When used in combination with local incentives, this federal tax credit can spur economic development in Texas communities and encourage responsible stewardship of our important cultural resources.

Read on to discover how to navigate the program and take advantage of this valuable financial resource just as the Old State Bank Building project in San Marcos did.

What are the main principles for qualification?

When embarking on a rehabilitation project, evaluate the following statements to determine whether or not the building qualifies for a 20 percent tax credit.

  • The building must be a certified historic structure. The building must be listed individually in the National Register of Historic Places, or it must be a contributing building within a registered historic district. A registered historic district is any district listed in the National Register of Historic Places. If certified by the Secretary of the Interior, a state or local district may also qualify as a registered historic district.
  • The work must qualify as a substantial rehabilitation. The cost of qualifying rehabilitation expenditures must exceed the pre-rehabilitation value of the building. Qualified rehabilitation expenditures include, but are not limited to, construction-related costs, architectural and engineering fees, site survey fees, legal expenses, and development fees.
  • All exterior and interior rehabilitation work must follow the Secretary of the Interior's Standards for Rehabilitation. To ensure that alterations are consistent with the character of the historic property, all interior and exterior work must meet the Standards for Rehabilitation. These standards provide guidance for rehabilitation, allowing some alteration that may be necessary for a contemporary use. To view the Standards for Rehabilitation, visit www2.cr.nps.gov/tps/standguide/index.htm.
  • The applicant must complete all of the appropriate paperwork and submit it to the THC Division of Architecture. The THC is the first point of contact for tax credit projects. The state agency will review the application for completeness and accuracy and may even conduct site visits. After approval at the state level, the application is forwarded to the NPS for final review and decisions.
  • Following rehabilitation, the building must be used for an income-producing purpose for at least five years. The tax credit is available only to properties rehabilitated for income-producing purposes such as commercial, industrial, agricultural, rental residential, and apartments. Owner-occupied residential structures cannot receive the tax credit.

Are there any other conditions that may affect eligibility?

Yes, there are several other conditions that may exist on the property or within the rehabilitation plans that affect the project's eligibility for the 20 percent tax credit.

  • Physical Integrity. There must be sufficient historic material remaining on the site prior to any rehabilitation work.
  • Non-Historic Surface Coverings. Before granting approval, the NPS may require removal of any non-historic surface coverings to verify that adequate historic material remains.
  • Multiple Buildings. If the property contains multiple buildings that were functionally related (farms, mills, etc.), decisions concerning the rehabilitation work will be based on its effect on the entire property, not the single building.
  • Relocations. Relocation of buildings can jeopardize listing in the National Register of Historic Places. Consult the THC as soon as possible to ensure the projectÕs continued compliance.
  • Demolition. Demolition, either of the whole building or only part of the structure (porch, etc.), can be a tricky undertaking. Consult with the THC to carefully plan any demolition work.

How complicated is the application process?

After verifying that the project satisfies all of the previous qualifications, the application process may begin. Depending on the complexity and size of the project, you may need some assistance completing the paperwork. Remember that the THC Division of Architecture is your first point of contact. The staff can provide application forms, regulations, and technical assistance.

  • Part One - Evaluation of Significance. Complete Part One to determine if the building contributes to the significance of a historic district or if it is eligible for individual listing. Properties already listed individually in the National Register of Historic Places do not need to complete this section.
  • Part Two - Description of Rehabilitation Work. This section of the application will include a property narrative, photographs illustrating the features of the building in its current state, and a description of all proposed work. All work must meet the Secretary of the Interior's Standards for Rehabilitation and will be reviewed by the THC and the NPS. The NPS has final authority over all applications and may approve, conditionally approve, or deny applications depending on their compliance with the Standards. After approval is obtained, rehabilitation work may commence.
  • Part Three - Request for Certification of Completed Work. The final step of the application process is to request approval of all the completed work. The completed form, along with photographic documentation of all rehabilitation work, must be submitted to the THC. After a favorable evaluation by the THC and the NPS, the project will be declared a certified rehabilitation eligible for a 20 percent tax credit. This allows the applicant to file the tax return for the year the building is placed in service. The applicant is entitled to a dollar-for-dollar reduction in the amount of federal taxes owed as long as no IRS restrictions apply.

Is there help available?

Do not let the tax credit process overwhelm you! The THC is always eager to assist property owners in understanding and applying for the credits.

Contact the Division of Architecture staff at (512)463-6094 or architecture@thc.state.tx.us.

Additionally, both the National Park Service and the National Trust for Historic Preservation have developed helpful websites aimed at demystifying the tax credit process.

These links are:
Rehabilitation Tax Credit Guide, National Trust for Historic Preservation
Incentives! A Guide to the Federal Historic Preservation Tax Incentives Program for Income-Producing Properties