Federal Tax Credits
Federal Historic Rehabilitation Tax Credits
In conjunction with the Internal Revenue Service, the National Park Service partners with State Historic Preservation Offices to administer the Federal Historic Preservation Tax Incentives, contained in the Internal Revenue Code Section 47. The credit was created to promote community revitalization through the rehabilitation of historic properties. These projects generate jobs, increase property values and can aid in the development of moderate and low-income housing.
The current program incentives include a 20 percent tax credit for the rehabilitation of depreciable, historic structures and a 10 percent tax credit for the rehabilitation of non-historic, non-residential buildings constructed before 1936. The credit is generated in one year, but the property must remain in its rehabilitated form for five years. Qualified projects include residential, commercial and industrial projects but exclude private residences.
Federal New Markets Tax Credits
The New Markets Tax Credit Program was created as part of the Community Renewal Tax Relief Act of 2000 under Section 47 of the Internal Revenue Code. Its purpose is to spur investment into privately managed Community Development Entities (CDEs). In turn, these CDEs make loans and capital investments in business in low-income and underserved areas. Thus, these investments make investment capital available to help finance community development projects owned by corporations, non-profits, partnerships, or sole-proprietorships located within low-income communities.
The investor claims these tax credits over a period of seven years. The tax credit is equal to five percent of the total amount paid for the capital interest or stock purchase over the first 3 years. The value of the tax credit is six percent annually for the final four years.
Federal Low-Income Housing Tax Credits
In 1986, Congress enacted the Low-Income Housing Tax Credit Program (LIHTC), Section 42 of the Internal Revenue Code as part of the Tax Reform Act. The goal of this program is to encourage the private market to invest in affordable rental housing. The capital investment reduces the amount a developer would need to borrow, and by reducing the debt, the tax credit property can rent the units at a more affordable rate.
These tax credits can be claimed annually as a dollar-for-dollar credit toward their Federal tax liability over a ten-year period provided the property complies with the LIHTC Program requirements. This program is the largest and most successful real estate based tax credit and enables the construction of 125,000 units per year. Though the program has been successful for many years and created many units of affordable housing, the future remains bright as demand for affordable housing units continues to grow and is estimated to be in excess of 5 million units annually.
Energy Tax Credits
One of the newest and most talked-about tax credit programs can be found in Section 45 and 48 of the Internal Revenue Code: Energy Tax Credits. This tax credit program focuses on “green” energy, such as wind turbines, solar facilities, geothermal, biomass, fuel cells and other types of renewable, green energy. Section 45 covers energy credits generated by the production and sale of electricity generated by green facilities. Section 48 covers energy credits generated based on investment in energy producing facilities. With many states enacting legislation requiring a significant percentage of electricity to be derived from green facilities, the potential for growth of the energy tax credit program has developers and investors excited for what the next decade may hold.