Federal Historic Tax Credit.

What the HTC does

The federal Historic Tax Credit (HTC), authorized under Section 47 of the Internal Revenue Code, provides a 20% income tax credit on the Qualified Rehabilitation Expenditures (QREs) incurred in the certified rehabilitation of a certified historic structure. The credit is claimed by the property owner (or, in a master tenant structure, by a special-purpose lessee).

Two federal agencies share jurisdiction: the Internal Revenue Service administers the tax aspects of the credit, while the National Park Service (NPS) — through its Technical Preservation Services office — certifies whether the building qualifies as a historic structure and whether the proposed rehabilitation complies with the Secretary of the Interior's Standards for Rehabilitation. State Historic Preservation Offices (SHPOs) play a key supporting role: they review applications first and forward them with recommendations to NPS.

Program history

The federal historic preservation tax incentive structure dates to the Tax Reform Act of 1976, which created a deduction for rehabilitating historic buildings. The Tax Reform Act of 1981 converted the deduction to a more valuable credit. The Tax Reform Act of 1986 set the credit at 20% for certified historic structures (and 10% for non-historic pre-1936 buildings — eliminated by TCJA in 2017).

The Tax Cuts and Jobs Act (TCJA) of 2017 made a significant change: the 20% credit must now be claimed ratably over 5 years (4% per year) rather than 100% in the year the building is placed in service. This change reduced HTC pricing in syndication markets by approximately 10-15% from pre-TCJA levels.

OBBBA (P.L. 119-21, enacted July 4, 2025) made no changes to HTC. The credit operates under TCJA-amended Section 47.

How it works

What qualifies as a "certified historic structure"

A building qualifies if it is either:

• Individually listed on the National Register of Historic Places, or
• Located in a registered historic district and certified by the NPS as contributing to the historic significance of that district

The building must be income-producing after rehabilitation (commercial, industrial, agricultural, or rental residential — but not owner-occupied residential).

The 3-Part Application Process

1. Part 1: Evaluation of Significance. Confirms the building qualifies as a certified historic structure. Filed with the SHPO, which forwards to NPS. Not required if the property is already individually listed on the National Register.
2. Part 2: Description of Rehabilitation. Describes the proposed rehab work in detail with photos and drawings. NPS evaluates compliance with the Secretary of the Interior's Standards for Rehabilitation. Approval is required before the rehab work begins — though work can begin at owner's risk if the application is pending.
3. Part 3: Request for Certification of Completed Work. Filed after rehab completion. NPS confirms the actual work followed the approved Part 2 plans. The Part 3 certification is what the owner submits to the IRS to claim the credit.

The substantial rehabilitation test

QREs must exceed the greater of $5,000 or the adjusted basis of the building (typically depreciated cost basis, excluding land). This must be met within a 24-month measurement period (or 60 months for phased projects). The substantial rehabilitation test is what distinguishes "rehab" from minor work.

What counts as QRE

Qualified Rehabilitation Expenditures include:

• Direct rehab construction costs
• Architectural and engineering fees
• Construction-period interest and taxes
• Developer fees attributable to the rehab
• Reasonable site work directly tied to the historic structure

QRE excludes acquisition costs, costs of enlargement, costs allocable to non-historic additions, site improvements not directly tied to the structure, and landscaping.

Compliance and recapture

The HTC has a 5-year recapture period running from the placed-in-service date. Disposition of the property or change in use during this period triggers recapture on a sliding scale (100% in year 1, 80% in year 2, etc., dropping to 0% after year 5). Most syndicated HTC deals are structured to ensure the building remains in service for the full recapture period.

Twinning with LIHTC: the master tenant structure

The combination of HTC and LIHTC is one of the most powerful preservation tools available. A single deal can claim both credits on overlapping basis, generating substantial equity for adaptive reuse projects.

The complication is IRC § 50(d)(5): when HTC is claimed, the LIHTC eligible basis is generally reduced by the amount of HTC claimed. Without a workaround, twinning produces less equity than the sum of the two credits would suggest.

The master tenant lease workaround

The standard solution is a master tenant lease structure that separates the ownership entity (which holds the LIHTC) from a special-purpose master tenant entity (which holds the HTC):

1. The Owner LLC (typically a single-purpose LP) holds title to the rehabilitated building and claims the LIHTC
2. The Owner LLC executes a master lease (typically 30-50 years) of the entire building to a Master Tenant LLC
3. The Owner LLC elects under IRC § 50(d)(5) to pass the rehab basis through to the Master Tenant via the master lease
4. The Master Tenant claims the HTC; the Owner LLC retains LIHTC eligibility
5. Different equity investors fund each entity: HTC investor in the Master Tenant; LIHTC investor in the Owner LLC

This structure preserves the full economic value of both credits but adds significant transaction complexity. Most master-tenant deals require specialized legal and accounting counsel familiar with the structure.

State Historic Tax Credits

Twenty-nine states plus the District of Columbia currently offer state HTCs that can be combined with the federal credit. State HTC rates typically range from 20% to 30% of QRE. Some states allow transferability or syndication; others require the credit be claimed by the owner. State HTCs frequently make borderline projects feasible by stacking 20% federal + 20-25% state = 40-45% combined credit on QRE.

How to apply

1. Confirm National Register status (individually listed or contributing in a district)
2. Engage architect familiar with the Secretary of the Interior's Standards
3. File Part 1 (if needed) and Part 2 with the SHPO well before construction
4. Receive NPS Part 2 approval before incurring substantial QRE
5. Complete rehab in conformance with approved Part 2
6. File Part 3 after completion; receive NPS final certification
7. Claim credit on IRS Form 3468 ratably over 5 years beginning the year placed in service

Pairing with other programs

• LIHTC: Master tenant structure (see above); the most common pairing for affordable historic adaptive reuse
• State HTC: Stacks directly with federal HTC in 29 states
• NMTC: Available for QALICB-eligible properties in low-income census tracts (commercial component of mixed-use)
• HOME / HTF / CDBG: Gap financing layers for affordable units in historic adaptive reuse
• Opportunity Zones: Layered when the historic property is in an OZ tract

Practitioner resources

• National Park Service Technical Preservation Services (HTC homepage)
• The Secretary of the Interior's Standards for Rehabilitation
• National Register of Historic Places search
• Your State Historic Preservation Office (SHPO)
• IRS Form 3468 instructions (current year)
• Industry resources: Novogradac HTC coverage, NCSHA, National Trust for Historic Preservation