Rehab Tax Credit Basics

Federal 20 and 10 Percent Rehabilitation Tax Credits

How to Turn Tax Credits into Cash

Those building owners not able to fully utilize rehabilitation tax credits personally or who prefer cash during construction instead of a reduction in taxes owed, may choose to syndicate or sell a rehabilitation project’s credits. To do this, the building owner forms a limited partnership (LP) or a limited liability corporation (LLC) with a corporate tax credit investor through which the investor becomes (and must remain) one of the building owners for a 5-year period. (Section 47 of the IRC states that the credits can only be claimed by project owners.) The investor is then able to claim the federal tax credits generated by the project to defray its federal income tax liability. In return, the corporate investor makes an equity investment in the project.

The amount of the tax credit equity investment varies depending on the attractiveness of the transaction. ‘Pricing” is usually in the range of $.95-.99 cents on the tax credit dollar for the federal historic rehabilitation tax credit, $.65-.85 cents on the tax credit dollar for state historic tax credits, and $.65-.75 cents for the New Markets Tax Credit. (For more information on the New Markets Tax Credit program, view our NMTC Basics page.) Often these investors are direct tax credit investors (i.e. banks and other widely held corporations who buy the credits to defray their corporation’s tax liability. National Trust Community Investment Corporation is an example of a tax credit “syndicator” which, on the other hand, does not keep the credits, but furnishes them to another corporate entity with an appetite for tax credits. A fee is charged for this service.

Tax Credit Tips from NTCIC

You should allow at least 120 days from the date of application for the state and federal approval of Parts 1 and 2. Developers typically hire historic preservation consultants or an experienced preservation architect to complete this application. NTCIC will not close on a tax credit investment without an approved Part 2. It is highly recommended that you obtain an approved Part 2 before beginning construction. It is also advised that you use an architect who has prior experience with meeting the Secretary’s Standards. Failure to obtain a Part 3 approval triggers a tax credit recapture.
To examine in more detail the federal tax credit rules and regulations as they may apply to you and your property, refer to the Rehabilitation Tax Credit Guide. The Guide provides a step-by-step, interactive format for determining whether a project will be able to qualify, earn and redeem the federal rehabilitation tax credits.