Historic preservation tax credits have encouraged economic development in both Louisiana and Texas. Here is a brief overview of how historic tax credits work and how nonprofits can take advantage of them.
Tax credit options
Historic buildings add unique character to cities and communities while also carrying the potential for cultural, educational, and economic benefits. For states like Louisiana and Texas that are rich in historically significant architecture, there is great potential to use these structures for commercial use. Unfortunately, preserving older buildings is a costly investment, and it can be difficult to incentivize developers to take on these projects. Demolition and new construction is often cheaper, but it may destroy what makes a city special.
Both the Louisiana and Texas legislatures have created 25 percent historic preservation tax credit programs as a way to encourage the renovation of historic buildings in designated districts. Combined with the federal 20 percent Historic Rehabilitation Tax Credit Program, these two credits offer economic motivation to restore historic properties for income-generating purposes.
How preservation tax credits work
Each of the programs has distinct requirements. For the 25 percent state tax credits, income-producing buildings must be certified or designated as historic structures by appropriate state divisions or departments. All rehabilitation efforts will be checked for compliance with standards established by the office of the US Secretary of the Interior, and only expenditures that meet IRS qualifications can be applied to the credit.
The federal tax credit works much the same way, except it requires that buildings receive additional historical certification status from the National Park Service. Developers are able to combine these credits.
How can these programs help nonprofits?
Nonprofit organizations can get a dollar-for-dollar reduction of federal tax liability for 20 percent of the costs of certified rehabilitation activities to certified historic structures through the Federal Rehabilitation Investment Tax Credit Program. Nonprofits simply need to form a limited liability company (LLC) that would operate the property for a minimum five-year period.
As a nonprofit, you can maintain full control and ownership rights through the LLC. However, you will need to find an investor who has federal tax liability and would participate in the LLC. The tax credits are discounted by approximately 10 percent to attract investors to the project. Your investor basically purchases the tax credits from your organization.
Eligible nonprofit project examples:
- Historic theater renovation projects
- Nonprofit residential rental housing
- Historical societies
- Cultural museums housed in landmark facilities
- Colleges and universities
Examples of potential investors:
- Banks and other financial institutions
- Banks and other financial institutions
- Locally based corporations
- Financial brokers from around the country looking for projects to invest in that can provide the rehabilitation credit
Considerations:
If you are considering using these credits for a property you currently own, there are certain restrictions that you will need to review and understand. In thinking about historic preservation tax credits, you should know that projects should generally have a minimum cost of at least $1 million, as it is easier to find tax credit buyers for larger than for smaller projects.
Note to Louisiana nonprofits: The Louisiana 25% historical preservation tax credit program sunsets December 31, 2021. The credit will equal 25 percent of eligible costs and expenses incurred through December 31, 2017; the credit will drop to 20 percent effective January 1, 2018, regardless of the year in which the property is placed in service.
If you are a nonprofit interested in taking advantage of these money-saving programs, contact LaPorte Director Sarah Franatovich, CPA, at [email protected] for more information on how to qualify for historic preservation credits.