Historic Preservation Tax Incentives

By Lee Anne Wofford, Deputy State Historic Preservation Officer at the Alabama Historical Commission

The Alabama Historical Commission receives frequent calls requesting financial assistance for repairing and rehabilitating historic buildings. We inform those property owners that grant funds, when available, are rarely awarded for projects on private property. Instead, grants, particularly public-funded grants, are typically available for property that is owned and operated by government and non-profit organizations. Fortunately, there are tax incentives programs designed to assist owners rehabilitating historic buildings.

The National Park Service administers a federal tax credit program, in coordination with the IRS and State Historic Preservation Offices, that is available to owners who rehabilitate their historic building. The tax credit equals 20% of eligible rehabilitation expenditures and is used to reduce federal income taxes owed by the building owner. There are four key eligibility requirements for the Federal Historic Preservation Tax Incentives program:

  • Buildings must be listed in the National Register of Historic Places (NRHP) either individually or as a contributing resource in a district.
  • They must be used for income-producing purposes.
  • Buildings must be substantially rehabilitated, which means that project expenditures exceed the adjusted basis of the property or $5,000, whichever is greater. 
  • Work must follow historic preservation standards.

The owner must submit an application to the Alabama Historical Commission, who in-turn, processes the application to the National Park Service. Part 1 of the application certifies that the building is historic and eligible for the program, and Part 2 of the application certifies that proposed work meets the Standards for Rehabilitation. The application process can take several months, so it is important to incorporate the review period into the project schedule because plans should be approved prior to the start of the project.

The National Park Service website explains the eligibility requirements and application process and provides important information about the IRS side of the program https://www.nps.gov/tps/tax-incentives.htm. It is important to review this information and understand the IRS implications to determine if this program will work for you. First-time applicants can review introductory brochures that explain the program and process https://www.nps.gov/tps/tax-incentives/before-you-apply.htm.

The National Park Service recently approved the completed rehabilitation of Howell School in Dothan. The school was constructed in 1902 but was heavily modified in 1947 to serve as a textile factory. The project consisted of removing the non-historic addition, restoring masonry, installing windows, and rehabilitating the interior for senior housing.

Howell School BEFORE
Howell School AFTER

Similar to the federal program, the Alabama Historical Commission administers the Alabama Historic Rehabilitation Tax Credit program, in coordination with the Alabama Department of Revenue, that is available to owners who rehabilitate their historic building. The tax credit equals 25% of eligible rehabilitation expenditures and is used to reduce state income taxes owed by the building owner. Two major differences with the state program is that private residences are currently eligible for the program, in addition to income-producing properties, and excess tax credits are refunded to the property owner. Some key factors of the Alabama Historic Rehabilitation Tax Credit program include:

  • Buildings must be listed in or eligible for the National Register of Historic Places and at least 60 years old.
  • Project expenditures must exceed 50 percent of the purchase price minus the value of the land or $25,000, whichever is greater.
  • Work must follow historic preservation standards. The application is very similar to the federal application and is accepted on a quarterly basis for consideration by an evaluating committee.
  • Tax credit reservations are capped at $5 million for commercial properties and $50,000 for private residences. A total of $20 million in tax credits are available each tax year from 2018 to 2027, and $8 million of each year’s allocation is set aside for rural communities for the first nine months of the year.

The program runs through the end of 2027, and the Alabama Legislature recently passed several important amendments to the program. The biggest change to the program is that beginning in 2023, owner-occupied primary and secondary residences will no longer be eligible for state historic tax credits.   Information about the Alabama Historic Rehabilitation Tax Credit program may be found on the AHC’s website https://ahc.alabama.gov/alabamarehabtaxcredits.aspx.  

The Alabama Historical Commission approved the completed rehabilitation of Womack’s Hardware in Monroeville. This commercial building was constructed in 1940. It was originally a family owned hardware store. The rehabilitation project restored the façade, floors, windows and doors, cleaned the brick, and converted the second floor into apartments.

Womack’s Hardware BEFORE
Womack’s Hardware AFTER

Anyone with questions on how to make repairs to historic buildings would benefit from perusing technical information issued by NPS and organized on their website as “Preservation by Topic” https://www.nps.gov/tps/how-to-preserve/by-topic.htm. It covers repair methods for typical historic materials such as wood or steel windows; brick and stone masonry; and plaster, stucco, or concrete.  It also addresses rehabilitation issues such as installing HVAC ductwork, providing accessibility, repairing or replacing storefronts, and cyclical maintenance.  

For those committed to completing a sensitive historic rehabilitation, the Secretary of the Interior’s Standards for Rehabilitation are guidelines established by NPS that advocate repair of historic materials (rather than replacement) and retention of the historic character of the property. Rehabilitation standards accommodate alterations to a building for a new use while retaining the building’s historic character https://www.nps.gov/tps/standards/rehabilitation.htm. NPS provides guidance on “Planning Successful Rehabilitation Projects” https://www.nps.gov/tps/standards/applying-rehabilitation/successful-rehab.htm. Case studies for common historic rehabilitation issues are also available and called “Interpreting the Standards Bulletins” https://www.nps.gov/tps/standards/applying-rehabilitation/standards-bulletins.htm.

In addition to the federal and state income tax incentives described above, there is a property tax benefit for owning historic property located in Alabama. All historic property, regardless of use, is considered Class III property, which is assessed at the same rate as residences. This provides no further benefit to homeowners, whose houses are already Class III property, but it could benefit commercial and investment properties, which are Class II property. Class II property currently assessed at 20% could be reclassified as Class III property and assessed at 10% if the building is historic. To determine if a property is eligible for this Ad Valorem benefit:

  • Buildings must be listed in or eligible for the National Register of Historic Places. 
  • Owners must complete an Ad Valorem Assessment Application and submit it to the AHC.
  • AHC staff review applications and issue letters to owners indicating the eligibility of the building for the property tax reduction. Owners present letters for eligible buildings to their Revenue Commissioner for the reassessment.

Alabama Historical Commission staff are available to explain a variety of historic preservation programs. Historic preservation consultants and preservation architects are helpful in assisting property owners with historic rehabilitation projects, completing paperwork, and drawing up plans for a project. Using contractors experienced in working on historic buildings is also recommended. It takes specialized contractors to know how historic buildings work and to appreciate the need to perform work in a sensitive manner. The Alabama Trust for Historic Preservation has a list of “Consultants & Contractors” on their webpage that may be useful when planning a rehabilitation project https://athp.org/consultants-contractors/

Chloe Mercer coordinates the federal historic rehabilitation tax credit program and may be contacted at Chloe.Mercer@ahc.alabama.gov / 334.230.2669 and Hannah Garmon coordinates the Alabama Historic Rehabilitation Tax Credit and Ad Valorem assessment programs and may be contacted at Hannah.Garmon@ahc.alabama.gov / 334.230.2644. Both work for the Alabama Historical Commission, the State Historic Preservation Office, whose mission is to protect, preserve, and interpret Alabama’s historic places.