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Economic development tools: Historic rehabilitation credits

The following article is the second in a series about economic development tools and how to use them.

An important role of today's economic development professional is understanding and communicating information to developers about available incentives and how these federal, state and local economic development incentives can turn a project with an otherwise marginal cash flow projection into a worthwhile venture. This is particularly true when dealing with the rehabilitation of historic downtown buildings and redevelopment projects which may pose a higher investment risk.

Tax credits are one of the most commonly used forms of economic development incentives. South Carolina is fortunate to have a growing number of tax credit tools, many of which can be combined to maximize investor benefit. These credits fall into two categories: historic rehabilitation and special use credits. This article will focus exclusively on historic rehabilitation credits. Special use credits will be covered in a future article.

The Federal Historic Rehabilitation Tax Credit allows a federal income tax credit for developers rehabilitating buildings that are listed on the National Register of Historic Places or contribute to a National Register historic district. The federal income tax credit is equal to 20 percent of eligible rehabilitation expenses. The property must be used for income producing purposes, and the rehabilitation investment must exceed the adjusted basis of the building. The adjusted basis is the net cost of the building after adjusting for various tax-related items and is calculated based on the length of ownership.

The calculation is different for newly acquired properties. The adjusted basis equals the purchase price of the property less the value of the land. In the case of property held by an owner/investor, the adjusted basis is calculated by adding the purchase price of the property and any capital improvements then deducting from this sum the value of the land and depreciation.

Before starting any work, the State Historic Preservation Office of the South Carolina Department of Archives and History must review the rehabilitation plans to ensure they comply with the U.S. Secretary of the Interior's Standards for Rehabilitation.

In South Carolina, developers who successfully complete the application process for the federal tax credit automatically qualify for a 10 percent state income tax credit.

The credit is claimed in equal amounts over a five-year period, beginning with the year that the property is placed in service. Any unused credit may be carried forward for the next five years. How the credit is distributed will vary based on how the business entity is legally structured. Like most tax credits, the historic credit can be either used to offset the building owner/investor's state tax liability or transferred through syndication to a corporate investor in exchange for additional equity capital (cash) that can be utilized for long-term financing of the project.

To claim the state credit, the taxpayer must attach to his South Carolina Business Income Tax return a copy of the appropriate federal tax forms showing the amount of federal rehabilitation credit claimed.

Sample calculation

 Adjusted Basis of Building..........$150,000
(+) Eligible rehabilitation
Total project cost                      $450,000

Federal tax credit.........................$  60,000 
($300,000 x .20) = $60,000

State tax credit.............................$  30,000 
($300,000 x .10) = $30,000]

In this example, the property owner is eligible to receive a combined tax credit of $90,000.

The benefits of using historic tax credits extend beyond the developer. The entire city or town benefits from the historic building being preserved because of the significant increase of the renovated building's market value and because of the stimulated local economy from the jobs created and infusion of capital.

In 2015, S.C. Code Ann. - 12-6-3535 was amended to allow a taxpayer to elect a 25 percent historic tax credit in lieu of the ten percent credit, not to exceed one million dollars for each certified historic structure.