By Bryan Freshcorn, CPA, Tax Manager | Real Estate & Construction Industry Team
Virginia Historic Rehabilitation Tax Credit (HRTC): What Real Estate and Construction Companies Need to Know
Last month we posted a blog article about Virginia’s Enterprise Zone Real Property Investment Grant (RPIG) program. If completed in 2019, your project could result in state grants of up to $200,000 for projects exceeding $5 million in eligible costs, or up to $100,000 for less than $5 million. This is a “use it or lose it” program with a hard deadline of April 1. If you have not yet started your application, you need to do so now, because it requires the assistance of a CPA firm.
This month, let’s revisit our 2018 article on Virginia’s Historic Rehabilitation Tax Credit (HRTC) program. To recap, this is a program with federal and state tax credit components, overseen in partnership with the National Park Service by Virginia’s Department of Historic Resources (DHR).
The credit is earned by rehabilitating “certified historic structures.” Buildings listed on the National Register of Historic Places or certified as contributing to a National Historic District are eligible for the federal credit. For the state credit, there is the Virginia Landmarks Register and district. Most properties listed on the Virginia register are also listed in the national register or vice versa. Certification that a structure contributes to a district is obtained via Part 1 of the Virginia tax credit application.
The federal credit amounts to 20 percent of “qualified expenditures,” while the state credit amounts to 25 percent. The state credit can be used in its entirety in the year of completion, but the federal credit must be used ratably over five years (4 percent per year). Note that owner-occupied residential property does not qualify for the federal credit.
There are a few drawbacks to the HRTC and RPIG programs:
- The General Assembly appropriates X dollars to the Enterprise Zone program ($4.5 million for 2019). After paying out Job Creation Grant awards at 100 percent, the remainder is distributed to the approved RPIG recipients. Because the remainder is typically less than the approved RPIGs, the caps of $100,000/$200,000 are subject to haircuts. In 2018, the award was 74 cents on the dollar and 70 cents in 2017.
- And keep in mind that the HRTC is a Faustian bargain – you must depreciate the qualified expenditures using a straight-line method. That also means no bonus depreciation and no Section 179. And because the credits are essentially reimbursements of your rehabilitation costs, the credits reduce your depreciable basis in those costs.
- Unlike the RPIG, HRTC-qualified expenditures are only allowed for the rehabilitation of the building itself. Land improvements and costs to expand existing structures are not eligible.
- Finally, the federal tax rehabilitation credit is not capped, while the HRTC is capped at $5 million per property.
- The federal rehabilitation credit is subject to recapture – the amount subject to recapture is reduced by 20 percent per year.
With proper planning, project owners can optimize the incentives’ benefits:
- Generally, projects eligible for the Virginia RPIG also qualify for the HRTC, but not all HRTC-qualified expenditures qualify for the RPIG.
- Because land improvements do not qualify for HRTC, they continue to be eligible for accelerated and bonus depreciation. Accordingly, report those costs for the RPIG.
- As we mentioned in last month’s RPIG article, there are thresholds to meet before expenditures qualify. If you spend at least $50,000 in solar panels, then the threshold is reduced by $50,000.
- For purposes of the HRTC, soft costs are permitted, as is a “reasonable” related-party development fee. Presuming a development fee is appropriate in your situation, be sure to properly allocate between HRTC and RPIG. Although the RPIG-allocated fee will not be eligible for the RPIG, the allocated fee may still be eligible for accelerated depreciation.
- Note that if your project is qualified as an Opportunity Zone Fund, then the possible federal rehabilitation credit recapture may not be an issue, due to the implicit long-term holding period.
- Finally, consider other state and local incentives. Localities often offer additional incentives, such as real estate tax exemptions. See a list of the local administrators.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.