Historic Tax Credit Projects are getting COVID-19 relief to meet the “Substantial Rehabilitation Test” for claiming historic tax credits (HTCs). The IRS published Notice 2020-58 on July 30, 2020. Taxpayers with a 24- or 60-month measuring period who are required to finish the project under the substantial rehabilitation test on or after April 1, 2020, and before March 31, 2021, now have until March 31, 2021 to satisfy the test to claim the HTC or determining if the project qualifies under the transition rule provided in tax reform legislation at the end of 2017.
The Substantial Rehabilitation Test means the cost of rehabilitation must exceed the pre-rehabilitation cost of the building. Generally, this test must be met within two years or within five years if it is a multi-phased project, whichever is applied for with the State Historic Preservation Office at the onset of the project. Per the National Park Service’s eligibility requirements, the cost of the project must exceed the greater of $5000 or the building’s adjusted basis. The adjusted basis is the cost of the building minus the cost of the land, less any depreciation taken with the addition of any capital improvements made since purchase.
Under normal conditions and especially under COVID-19, many smaller HTC projects are finding it difficult to raise money. The industry is advocating for changes that would help in this effort and the HTC in general. The Moving Forward Act, a bill passed by the House of Representatives, contains numerous infrastructure and tax legislation changes, with significant amendments to the HTC. This is only a proposal and will have to pass the Senate, and then be signed into law. The industry remains hopeful that some of these items will be passed. The list of improvements contained in the proposal include:
- Increasing the HTC percentage to 30% (from 20%) for 2020 through 2024, then reducing it to 26% in 2025, 23% in 2026, and back to 20% in 2027.
- Increasing the rate permanently to 30% for small projects with eligible QREs capped at $2.5 million.
- Reducing the substantial rehabilitation to 50% of adjusted basis, from 100%.
- Eliminating the basis adjustment so the HTC would no longer be deducted from a building’s basis. This would eliminate the 50(d) income for two-tiered transactions, which would make it easier to do joint LIHTC-HTC transactions as they would be on par with one another. Currently, the law creates a complex structure for investment in the partnership and the basis reduction reduces the LIHTC component.
- Making the HTC available to many tax-exempt projects, such as museums, theatres and non-governmental colleges and universities.
- Making the HTC available for public school buildings.
Clocktower Tax Credits will continue to monitor these proposals and will provide updates on any significant progress made. If you have a project that needs investor tax credit equity, don’t hesitate to call us. We work with developers with prospective Historic rehabilitation or Low-Income Housing tax credit projects seeking Federal and/or State tax credit equity, and unique state incentives such as the Massachusetts HDIP and Pennsylvania REAP credits. For inquiries, please contact Sue Ellyn Idelson at (978) 793-9574 or SIdelson@ClocktowerTC.com.