We left off with my promise to share what I found out about the 10% tax credit, and just what you could or couldn’t do with it when it comes residential rehabilitation.
I started by checking out Form 3468 from the IRS, the form you attach to your return (you can view a PDF of the form here). One definite advantage to the 10% credit is the fact that there’s no 3-part process involving the SHPO, the National Park Service, the IRS, and your raft of consultants (depending on the complexity of your project). You report your 10% credit on a three-page form that you include in your annual return. And really, it’s one line multiplying your Qualified Rehabilitation Expenditures by 10%, and entering that total on the last line of the form.
In consulting the 2013 Instructions for Form 3468 (which you can find here) because nothing with the IRS is as easy as writing the total in one line, we learn that the Qualified Rehabilitation Expenditures have to be for “nonresidential rental property.” So what exactly does that mean? Sorry, the IRS can’t be bothered with including definitions for common terms used on the form. That would be…helpful.
However; undaunted, and hot on the trail of this mystery, I google “nonresidential rental property definition” and then I google “residential rental property definition” which brings me to the next IRS publication. IRS Publication 527 covers residential rental property (yep, I’ve got your link for it here) and the IRS gets into property classes. While the classes don’t include “nonresidential rental property,” we do get a definition for “residential rental property” as follows:
This class includes any real property that is a rental building or structure (including a mobile home) for which 80% or more of the gross rental income for the tax year is from
So, does that mean the inverse applies for the definition of nonresidential rental property? As long as less than 80% of your income comes from dwelling units, is your property defined as nonresidential rental property in the eyes of the IRS? I kept searching.
A fair amount of googling later, I came upon IRS Publication 946, which delves into property depreciation (you glutton…here you go) and the good folks at the IRS included a glossary in the publication. Their definition for residential rental property (sorry, nothing under the Ns for nonresidential rental property) is:
Real property, generally buildings or structures, if 80% or more of its annual gross rental income is from dwelling units.
So, again, do we flip greater than 80% for less than 80% to come to the definition of nonresidential rental property? And, anyway, why should we really care?
And the answer is that there is a lot of potential for the renovation of old, mixed-use commercial buildings, 2- 3- or 4-story, that could use the 10% rehab tax credit, but that don’t, leaving serious incentive money on the table. According to the IRS, as long as less than 80% of your income comes from the residential portion of your building, the IRS categorizes it as nonresidential rental property, and appears to be eligible for the 10% tax credit. And on a $100,000 rehab project, that’s an extra $10,000 in the developer’s pocket at the end. Not bad for filling out a couple lines on your tax return.
Now, since I’m not a lawyer or tax advisor, I’m afraid all I can do is whip you into a frenzy over incentive dollars you could be taking advantage of (or did all the IRS publications already do that?) so please don’t take this as a substitute for consulting your own favorite tax person or lawyer.
If you have your own two cents, or 10%, to contribute to the conversation, I’d love to hear from you. Have you successfully taken the 10% credit on a project with a residential component? Have you uncovered that elusive definition of nonresidential rental property that you would be willing to share? Thanks for reading!
Every good preservationist knows that rehab tax credits get subdivided into two neat categories: the 20% credit for the rehab of National Register-listed buildings, and the 10% credit for the rehab of non-NR properties constructed before 1936. Every good preservationist also knows that the 10% credit can only go toward buildings with non-residential uses (it says so in the Historic Preservation Tax Incentives brochure that you can check out here).
As someone who likes to consider myself somewhat well-versed in the rehab tax credits, you can imagine my surprise when my Historic Real Estate Finance instructor asserted that, in fact, you could use the 10% credit for a project that included a residential component. I remember thinking at the time that that was a good piece of tax credit info to know, and I filed it away in my mind.
Fast forward to yesterday, and Joyce and I were having a conversation with a developer who is redeveloping a non-NR building, constructed before 1936, for mixed use.
So, I bring up the 10% tax credit. The developer would use the 10%, but the building development will have a residential component…and then I pounce.
Well yes, but, did you know you *can* use the 10% on a mixed use project with residential?
However, after piquing the developer’s interest, I realize I can’t exactly defend my position with official IRS definitions, or publication references proving my point. So, I tasked myself with a mini-IRS immersion to first and foremost conclusively prove (at least to myself) that I’m providing useful information a building developer will actually be able to use.
I’ll share my search for definitive answers (and the results) in Part II.
A somewhat quiet, but nonetheless controversial, tax credit ruling erupted in August of 2012, when a court decision found that a development partner in a historic rehab was not, in fact, a bona fide development partner. What did this mean? Quite simply, this ruling had the potential to take redevelopment partners, often the development partners who put upfront construction money into a project, off rehab projects. And removing the funding source to make construction happen means stopping rehab projects in their tracks (this article from the Canton Repository shows how the Boardwalk decision hit home in Ohio.)
Without clear guidelines on how the IRS would treat development partners, active investment has lagged in the past 16 months. Fortunately, the IRS recently published guidelines to clarify development partners’ relationships, and how those partners can make use of tax credit allocations. The Preservation Exchange, a blog originating from Preservation Studios in Buffalo, NY, published a post providing analysis of what the IRS guidelines may mean for future developer partnership structures. You can read the PE post here.
You can read the IRS guidelines here. Heritage Ohio will continue to monitor the impact of the IRS guidelines and share updates as we learn of them.
You are invited to celebrate Cincinnati’s Historic Buildings…
Tuesday, January 14, 2014
21c Museum Hotel
609 Walnut Street
Cincinnati, Ohio 45202
The Ohio Development Services Agency invites you to this special event to celebrate Cincinnati’s preservation of historic landmarks. Speakers include David Goodman, Director of the Ohio Development Services Agency; Mary Cusick, Chief of TourismOhio; Stephen Leeper of the Cincinnati Center City Development Corporation (3CDC) and Kevin Pape of the Over-the-Rhine Foundation. Join us for a presentation and tour of the award-winning facility, 21c Museum Hotel and learn about other Ohio Historic Preservation Tax Credit projects coming to fruition in 2014.
Questions can be addressed to Nathaniel Kaelin, Ohio Historic Preservation Tax Credit Program Manager, at (614) 728-0995.
Parking available via valet (for a fee) and at nearby garages
Today the Ohio Development Services Agency announced that 31 buildings in 10 different communities received allocations of the Round 11 tax credits. As in past rounds, the credits were divided for projects throughout the state (although the northwest and southeast regions were absent from this round). While few dispute the power of the credits in making multi-million dollar rehabilitation projects possible (with three separate projects taking the maximum $5 million per project), the state continues to work to make sure smaller projects don’t fall through the cracks. This round of credits included a $65,000 rehab project in Wilmington. The Wilmington project is slated to receive $13,825. You can read the ODSA press release here.
Yesterday the Ohio Development Services Agency (the former Ohio Department of Development) announced the tax credit awards from the 9th Round of the Ohio Historic Preservation Tax Credit. You can read the full release here.
The big projects we’ve seen in the past are back again (Cleveland rehabs account for tens of millions of dollars in project costs); however, we also continue to see the emergence of smaller projects. The Lazarus House Apartments in Columbus will be rehabilitated into three apartment units in Columbus, at a total project cost of $265,860, taking a state tax credit of $46,195. While I love to see big projects such as the East Ohio Building in Cleveland with its 65 million dollar construction impact, I’m even more heartened to see the scale of projects receiving funding. I could envision the Lazarus Apartments happening in any of our Main Street communities, and I know if we can pump more construction investment into our Main Street communities, they will be better positioned to thrive far into the future.
Stay tuned to Heritage Ohio and Ohio DSA for updates on the state tax credit. For now, the next date to remember is March 30, 2013. Round 10 applications are due then.
Best wishes to you for a prosperous 2013 filled with preservation & revitalization!
The application period for Round 9 of the Ohio Historic Preservation Tax Credit program is now open. The application form and self-scoring sheet can be downloaded under ‘General Program Forms’ on the program website: http://development.ohio.gov/Urban/OHPTC/. A total of $30 million in tax credit allocation is currently available for Round 9 applicants.
All applicants are required to schedule pre-application meetings with both the Office of Redevelopment and the Ohio Historic Preservation Office prior to submitting an application. Applicants are encouraged to contact both offices early in the application submission period to schedule the meetings to ensure availability. The Ohio Historic Preservation Office can be contacted by calling 614-298-2000.
Please note that applications must be submitted (not postmarked) to the Office of Redevelopment by 5:00 p.m. on Monday, October 1, 2012.
Round 9 will be administered on the following schedule:
– Application Submission Deadline: October 1, 2012
– Application Review Period: October 2 – December 17, 2012
– Approved Applications Announced: on or before December 31, 2012
Please contact Nathaniel Kaelin at email@example.com if you have any questions about the application and to schedule a pre-application meeting. Thank you for your interest in the Ohio Historic Preservation Tax Credit Program.