Rehabilitation Investment Tax Credits (RITCs)

The Rehab Investment Tax Credit program has done much since its inception to stimulate interest in rehabilitating older structures. The program has changed considerably in those years. The current program operates according to the provisions described below.1

What Buildings Qualify?

Buildings may qualify for RITC's either as "historic" or "non-historic." To be considered "historic" a building it must either be a listed on the National Register (a Certified Historic Structure) or be a contributing structure in a historic district which has been recognized by the Secretary of the Interior. The costs of rehab on these buildings qualify for a 20% credit. An eligible "non-historic" building is simply one built before 1936, and it is eligible for a 10% credit. Buildings are eligible for the 20% credit only if they are used in a trade or are income-producing. Residential rental units qualify as well as nonresidential uses. For the 10% credit a building must be nonresidential.

Financial Methods

The great incentive inherent in the RITC program is that tax credits are given, which provide a dollar-for-dollar reduction in the income tax owed, rather than just a deduction. The Rehab Investment Tax Credits taken may be used to offset up to $25,000 of personal income tax liability. Beyond that they may offset 75% of such liability. Credits not used in one tax year may be carried forward for up to 15 years or carried back three years.

Credits can be used only by individual taxpayers or closely held corporate taxpayers (five or fewer shareholders owning more than 50% of the stock). They do not apply to work done to buildings owned by other types of corporations or non-taxpaying institutions.

If the building is sold, exchanged or converted to personal use within five years after the credit is taken, the tax credit must be repaid at a recapture rate of 20% for every year under the 5 year minimum. For example, if the building was sold after three years the owner would need to repay 40% of the credit taken. The new owner would not be eligible for any portion of the credit.

An example will illustrate the important tax advantages of the RITC program to a property investor. First, assume an investment of $1 million in the construction of a new building. With straight-line depreciation over 31.5 years (the standard rate) the tax benefits accruing over the years would be $80,638.1

For comparison assume an investment made up of $250,000 to purchase a historic property and $750,000 to rehabilitate it. With the resulting 20% credit for the rehab and similar depreciation the tax benefits would total $204,906, more than two and one-half times the benefits.

In conclusion, it is important to realize that the tax credit program is complicated and subject to change. What has been described is a general overview of the major provisions. Before work is actually begun on any such project one should get the advice of a reliable financial advisor.

1 For a fuller explanation, see Preserving America's Heritage: The Rehabilitation Investment Tax Credit, published by Touche Ross & Co. and the Ohio Historic Preservation Office, 1987.
2 Both examples give present value of such tax benefits, assuming 10% discount and 28% tax rate.
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