Through the Internal Revenue Code Section 47, the federal government offers lucrative rehabilitation tax credits to encourage preservation and adaptive reuse of historic and pre-1936 buildings. Calculated as a percentage of the eligible rehabilitation expenses, federal tax law offers a 20% tax credit for substantial rehabilitations of historic buildings, and a 10% tax credit for substantial rehabilitations of non-historic, non-residential buildings built before 1936.

A substantial rehabilitation means that a taxpayer's rehabilitation expenditures during a 24-month or 60-month measuring period must exceed the aggregate "adjusted basis" of the building. The adjusted basis is generally defined as the purchase price, minus the value (or cost) of the land, plus the value of any capital improvements made since the building acquisition, minus any depreciation already claimed.

The federal tax credit program for historic buildings is administered by each state's historic preservation office and requires approval from the National Park Service, a division of the U.S. Department of the Interior. In contrast, the 10% rehabilitation tax credit for substantial rehabilitations of non-historic, non-residential buildings built before 1936 is a single IRS tax form submission and requires no federal or state involvement.

These tax credits can be either used to offset the building owner's federal income tax ...