Historic Preservation Tax Incentives for Owning and Rehabilitating Buildings in Alabama Presented by Chloe Mercer The AHC is a state agency, located in Montgomery, that administers state and federal historic preservation programs. We are also known as the State Historic Preservation Office – there is one in every state. Alabama Register, National Register, and we also have a Cemetery Register Certified Local Government program (which strengthens local HP efforts) State and Federal tax incentives Archaeology outreach and education Regulatory review of federal impacts on historic resources The AHC also owns several historic sites in Alabama

Historic Preservation Tax Incentives State benefit for OWNING historic buildings All historic buildings are designated Class III, lowest property tax classification Federal tax incentive for REHABILITATING buildings Tax credit may be earned for rehabbing income-producing historic and non-historic buildings NEW to Alabama… State tax incentive for REHABILITATING buildings Tax credit may be earned for rehabbing income-producing and residential historic buildings There are rarely any grant funds available for rehabilitating privately-owned historic property However, there are tax incentives for owning and for rehabilitating historic property at the state and federal levels I will be going over: a state benefit for owning historic buildings The Federal historic preservation tax credit program for income-producing buildings Alabama has a new State Rehabilitation Tax Credit program, which was established a year after the first program ended

Property Tax Benefit for Historic Buildings Code of Alabama 40-8-1 Section 2 Designates all historic buildings as Class III property, regardless of use. Assessment rate for ad valorem tax purposes is 10%. Historic = buildings determined eligible for listing in the National Register (NR) or already listed in the NR (individually or contributing to a district). Complete the application and send to AHC. AHC reviews application for eligibility and issues letter to owner. Present letter to revenue commissioner for reassessment. Rehabilitation of building is not required In Alabama, there is a benefit for owning historic property George Wallace signed a law back in the 1970s that designated all historic buildings, regardless of use, as Class III property – which is assessed the same as residential and agricultural property, at 10% Historic buildings are those that are listed in the NRHP or that are eligible for listing To determine if a property is eligible, the owner submits an application to the AHC This application is available on our website Staff reviews the application and issues a letter indicating its eligibility Owners then present the letter of eligibility to the Revenue Commissioner in their county to receive the reassessment Remember, this would not offer any additional benefit to homeowners since residences are already considered Class III property, but it would apply to investment property like rental homes or commercial buildings

Property Tax Benefit for Historic Buildings Code of Alabama 40-8-1 Section 2 Application Review the Instructions Physical description of building: exterior and interior History and Significance: uses over time, role in community (good example of architecture, important for history or an event/person) Current photographs, exterior and interior Location map (map of NR historic district) The application itself requires a physical description of the exterior and interior of the building, noting historic features and finishes and alterations The history and significance of the property must include things like the construction date, occupants and uses of the property over time, and the reason that it is historic – how the building relates to the significance and historic period of the district as identified in the National Register nomination Applicants provide current photographs of the exterior and interior of the building and a map of its location within the historic district Birmingham realtor who has completed several of these applications for his clients

Federal Rehabilitation Tax Credit Available for National Register-listed buildings Income-producing use Substantially rehabbed Must be a Certified project 10% Tax Credit Only available for non-historic buildings: built before 1936 and not listed in National Register (or considered non-contributing in district) Income-producing (non-residential) use Substantially rehabbed No certification process (unless located in district) Physical wall retention test We’ll now move on to the federal historic rehabilitation tax credit program that includes a 20% tax credit and a 10% tax credit depending on whether the building is historic or non-historic This program is for income-producing properties only Projects must be substantial, which means that expenditures exceed the cost of the building For the 20% tax credit, buildings must be listed in the NRHP, and the applicant must go through an application process to get the project approved I will go into the process for the 20% credit in more detail in a minute For the 10% tax credit, buildings must be constructed before 1936 and not be listed in the NRHP (or considered non-contributing in an historic district) There is no application process for the 10% credit, so work does not have to be approved; however, there is a certain percentage of internal and external walls that must be retained

What a Tax Credit means… Tax Credits are used toward the Applicant’s federal income tax liability Examples of Eligible Expenditures Arch/Eng fees Roofing Structural improvements Painting Repairs New mechanical systems Examples of Ineligible Expenditure Acquisition Enlargement Decks/Porches (added) Landscaping/Parking Cabinets/Appliances Furniture/Carpet (tacked) Window treatments Signage The historic tax credit equals 10 or 20 percent of eligible expenditures and is used to reduce what the Applicant owes on their federal income tax There are project costs that are eligible and not eligible for this tax credit Expenses that qualify for the tax credit include things like structural repairs, roofing, repairing plaster, refinishing floors, installing new HVAC or plumbing, and soft costs like architectural fees Expenses that do not qualify for the tax credit include things like acquisition costs, constructing an addition, landscaping, area rugs, and furnishings An example… If the applicant has $100,000 of eligible expenditures, they earn a $20,000 tax credit Applicants must claim the tax credit in the year the building is placed into service If the tax credit cannot be used all at once, the excess can be carried back one tax year and forward twenty Applicants must continue to own the building and use it for income-producing purposes for five years after placing the building into service Qualified rehabilitation expenditures (QRE) of $100,000 equals $20,000 tax credit The credit is taken in the tax year the building is placed into service The tax credit can be carried back one year and forward 20 years There is a five-year recapture period after the building is placed into service

20% Federal Tax Credit for historic buildings Program Participants National Park Service Reviews applications (30+ days) Certification decisions Internal Revenue Service Tax advice Audits State Historic Preservation Office (AHC) Guides applicants in each state - Rehabilitation - Application (review and process – 30 days) The AHC is the point of contact for anyone who wishes to apply for a project involving a building in Alabama We assist the applicant through the application process to insure they have a complete application and to alert them of problematic issues with their proposed rehab. We also have resources and guidance for rehab treatments and methods The NPS is the federal agency that reviews and makes final decisions on the applications The IRS is copied on all NPS decisions and can audit any applicant’s tax return Applicants should plan ahead and make sure they give the review process approximately 60 to 90 days Applicant

20% Federal Tax Credit for historic buildings Buildings must be eligible for program Buildings must be listed in the National Register of Historic Places Buildings may be individually listed or a contributing resource in an historic district Buildings must be income-producing (office, retail, restaurant, rental-residential, etc.) Projects must be Substantial Project expenditures must exceed the GREATER of $ 5,000 or the Adjusted basis Purchase price - Cost of land + Improvements - Depreciation Adjusted basis Example Purchase Price $180,000 (Cost of land $35,000) 180,000 – 35,000 = 145,000 Owner must spend over $145,000 to be eligible for the federal tax credit Picking back up with the 20% tax credit for historic buildings, this is for buildings that are listed in the NRHP – either individually or as a contributing resource in an historic district Buildings must be income-producing after the rehabilitation And the projects must be substantial, which means that expenditures exceed the adjusted basis of the property or $5,000, whichever is greater Adjusted basis is Purchase Price minus Cost of the land plus Improvements minus Depreciation For example, if someone purchases a property for $180,000 and the cost of the land is $35,000, their project expenditures must exceed $145,000 to be eligible to apply for the program

20% Federal Tax Credit for historic buildings Work must follow the Standards for Rehabilitation Projects must follow the Standards The National Park Service developed the Secretary of the Interior’s Standards to guide work on historic buildings Of the FOUR treatment Standards (preservation, rehabilitation, restoration, and reconstruction) the most widely used treatment – and the treatment used in historic tax credit projects – is Rehabilitation Rehabilitation allows alterations to accommodate a new use They apply to work on both the exterior and interior All work associated with a project is reviewed, so if there are additions, new construction, or site work associated with a development, they are reviewed for their compatibility with the historic building The predominant message of the Standards is to retain and repair historic materials, features, and spaces so that the historic character of the building remains in its new use

20% Federal Tax Credit for historic buildings Owners must apply and get approval Three-part application. Parts 1 and 2 should be submitted before work begins on the project, but the Part 1 must be submitted prior to placing the building into service. Applications are reviewed by the Alabama Historical Commission and the National Park Service. No review of work by AHC and NPS for 10% credit. Part 1 Physical description History and significance Photos of existing condition Location map Photos keyed to existing plans Part 2 Description of work Drawings of proposed work Part 3 Photos of completed work Photos keyed to plans Owners who undertake rehabilitation projects without prior approval from the National Park Service do so at their own risk. There is a three-part application process where the first two parts are submitted prior to the project beginning and the final part is submitted after the project is complete The Part 1 application certifies that the property is historic. Applicants must submit a physical description, a history and significance statement, photographs of the existing condition (keyed to plans), and a location map The Part 2 application certifies that proposed work follow the Standards. The application requires a detailed description of work that mentions all work to be performed on the building – descriptions could include the roof, exterior walls, windows, porch, foundation, floors, walls, ceilings, and upgrades of systems. Plans of the existing condition and plans showing the proposed work supplement the application. Other drawings such as elevations and sections or details are also helpful in a review The Part 3 application is submitted after all work is complete and provides photos of the property with all work completed

National Park Service website www.nps.gov/tps/tax-incentives.htm Technical Information on Rehabilitation www.nps.gov/tps/how-to-preserve.htm Information about the 10% and 20% tax credit program is available online at the National Park Service website. The website also has the Standards for Rehabilitation and guidance on interpreting these standards as well as technical how-to guidance

Last Ten Years In Alabama: Since 1976 - Nationally, the Federal Tax Incentives program has leveraged over 84 BILLION dollars in private investment in over 42,000 certified rehabilitation projects. Last Ten Years In Alabama: FY 2008 $ 7.7 million 9 projects FY 2009 $ 17.1 million 6 projects FY 2010 $ 4.9 million 7 projects FY 2011 $ 5.6 million 4 projects FY 2012 $ 4.4 million 3 projects FY 2013 $ 6.6 million 5 projects FY 2014 $ 11.4 million 7 projects FY 2015 $ 19.8 million 5 projects FY 2016 $ 46.1 million 11 projects FY 2017 $ 40.1 million 11 projects $ 163.7 million 68 projects This program has been around for over 40 years. It is the largest federal program that specifically supports historic preservation Nationally, there have been over 42,000 projects approved since the beginning with property owners investing over 84 billion dollars In the last decade, owners of historic buildings in AL have earned HP tax credits on over 163 million dollars of eligible expenditures on 68 projects This program has proven to be a strong catalyst for job creation and economic growth in our historic communities

Certified Rehabilitation 2201 Morris Avenue Birmingham Certified : 11/28/2014 Rehabilitated Use: Office Qualified Exp: $ 756,713 Federal Tax Credit: $ 151,343

2201 Morris Avenue Birmingham

Certified Rehabilitation Compton-Fowler House 601 Lauderdale Street Selma Certified : 02/26/2015 Rehabilitated Use: Apartments Qualified Exp: $ 255,000 Federal Tax Credit: $ 51,000

Compton-Fowler House

Compton-Fowler House

Contact Chloe Mercer at the AHC for more information chloe.mercer@ahc.alabama.gov 334/230-2669 Or visit our website http://ahc.alabama.gov