Can the Historic Tax Credit (HTC) Program Be Used in Opportunity Zones?
The Historic Tax Credit (HTC) program is offers a federal tax credit to investors who rehabilitate and re-purpose historic buildings. To encourage investment, the program allows participants to take 20% of a project’s eligible rehab expenses as a credit against their federal income taxes. The program, which began in 1976, has been utilized for the rehabilitation of over 40,000 historic buildings. In contrast, the Opportunity Zones program offers investors a way to defer and/or reduce their capital gains tax liability by investing in properties and businesses located in Qualified Opportunity Zones (QOZs), economically disadvantaged areas certified by the U.S. Department of the Treasury.
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The Historic Tax Credit (HTC) program is offers a federal tax credit to investors who rehabilitate and re-purpose historic buildings. To encourage investment, the program allows participants to take 20% of a project’s eligible rehab expenses as a credit against their federal income taxes. The program, which began in 1976, has been utilized for the rehabilitation of over 40,000 historic buildings. In contrast, the Opportunity Zones program offers investors a way to defer and/or reduce their capital gains tax liability by investing in properties and businesses located in Qualified Opportunity Zones (QOZs), economically disadvantaged areas certified by the U.S. Department of the Treasury. Both of these tax incentive programs can be combined to maximize investment yields, as long as investors can locate suitable historic property located within a QOZ.
How Historic Tax Credit Investing Works
Typically, the Historic Tax Credit (HTC) investor is a 99% equity investor in the LLC that owns the building. HTC investors are usually banks, and often benefit from the HTC due to the attractive rate of return. Banks or other investors typically exit these investments with a capital gain. In contrast, most larger HTC projects use a “master-tenant” structure, in which they usually exit with a capital loss. The HTC has a 5-year timeline; banks must hold onto the investment for at least 5 years or the credit will be “recaptured” by the IRS. In addition, if the property is foreclosed upon, the credits will also usually be recaptured.
To qualify for Opportunity Fund tax incentives, an investor needs to put in equal or more capital into rehabilitating a property than was used to purchase the property in the first place, which should not be particularly difficult for a full rehabilitation project for a historic structure, especially if the building is intended to rent to relatively affluent residential or commercial tenants.
In a rare case, HTCs could be combined with Low Income Housing Tax Credits (LIHTCs) in an Opportunity Zone, but this would generally be difficult, due to the fact that rehabilitations for affordable housing tend not to be as expensive, as future rental incomes would not generally support the substantial mortgage payments required.
Opportunity Zones Abound With Historic Property Investment Opportunities
In 2017, 475 out of 1035 (or 46%) of completed HTC projects were in Qualified Opportunity Zone (QOZ), and currently, out of the 462 HTC projects in progress, 266, or around 57%, are located in Opportunity Zones. This wide overlap of HTC re-development areas and Opportunity Zones means that there are likely tens of thousands of historic structures ripe for redevelopment within QOZs across the country. For example, New Orleans has a massive overlap of National Register of Historic Places Historic Districts and Opportunity Zones.
Related Questions
What is the Historic Tax Credit (HTC) Program?
The Historic Tax Credit (HTC) Program is a federal tax credit program which provides a 20% credit against the cost of rehabilitating eligible historic structures. It was created to encourage investors to fund the substantial rehabilitation of historic structures, and since 1976, it has been responsible for creating $144.6 billion in private investment while preserving more than 43,000 historic structures across the country. With the credit, an investor can take 20% of the project’s qualified costs as a deduction from their federal income taxes.
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How does the HTC Program work?
The Historic Tax Credit Program (HTC) works by providing developers attempting to apply for historic tax credits with the opportunity to receive tax credits if their project plan is consistent with the Secretary of the Interior's Standards for Rehabilitation. The purpose of these standards is to ensure that a developer makes as few changes as possible to the building, preserving the key historical and architectural elements of the property. Properties eligible for the HTC program are typically multifamily apartment buildings, office buildings, warehouses, and industrial buildings, though a wide variety of other structures are also potentially eligible. A crucial factor is that properties should have a good chance of generating income and creating jobs in the surrounding community in order to qualify.
In addition to combining benefits from Opportunity Fund investments with Historic Tax Credits, investors may also combine Historic Tax Credits with Low-Income Housing Tax Credits (LIHTCs) if the historic property serves a multifamily purpose. While the benefits of combining these incentives are quite impressive, in order to qualify, investors must be willing to make either a portion or all of the building’s units affordable.
What are the benefits of using the HTC Program in Opportunity Zones?
The Historic Tax Credit (HTC) Program offers a number of benefits when used in combination with the Opportunity Zones program. By investing in real estate located in Opportunity Zones via Opportunity Funds, investors can defer their capital gains taxes until 2026. Additionally, many Opportunity Zones overlap significant historical areas, meaning there is great potential to combine these two tax incentive programs to maximize investment yields. In cities like New Orleans, registered historic districts overlap Opportunity Zones in multiple areas, making it a prime area for HTC/Opportunity Fund redevelopment. In addition, 35 states (including Louisiana) also offer State Historic Tax Credits, which can be used against an investor’s state income tax liability.
The Historic Tax Credit Program offers investors the following benefits:
- Deferral of capital gains taxes until 2026
- Potential to maximize investment yields by combining HTC and Opportunity Zones programs
- State Historic Tax Credits available in 35 states, including Louisiana
Are there any restrictions on using the HTC Program in Opportunity Zones?
Yes, there are restrictions on using the HTC Program in Opportunity Zones. According to OpportunityZones.help, the HTC Program must be used in conjunction with the Opportunity Zone program, and the HTC Program must be used to rehabilitate a historic structure. Additionally, the HTC Program must be used in accordance with the Secretary of the Interior's Standards for Rehabilitation.
What types of projects are eligible for the HTC Program in Opportunity Zones?
The Historic Tax Credit (HTC) Program is available for a variety of projects in Opportunity Zones, including the rehabilitation of historic buildings, the construction of new buildings in historic districts, and the rehabilitation of non-historic buildings in historic districts. According to the Opportunity Zones Help website, eligible projects must meet the following criteria:
- The project must be located in a Qualified Opportunity Zone.
- The project must be a certified historic structure or a non-historic structure located in a registered historic district.
- The project must be a certified rehabilitation of a historic structure.
- The project must be a new construction project located in a registered historic district.
In addition, 35 states (including Louisiana) also offer State Historic Tax Credits, which can be used against an investor’s state income tax liability.
How can I apply for the HTC Program in an Opportunity Zone?
You can apply for the Historic Tax Credit (HTC) Program in an Opportunity Zone by investing in real estate located in Opportunity Zones via Opportunity Funds. Opportunity Funds are specialized investment vehicles which must keep at least 90% of their assets invested in Opportunity Zones. Additionally, 35 states (including Louisiana) offer State Historic Tax Credits, which can be used against an investor’s state income tax liability.
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