The Potential of Using Historic Tax Credits When Updating Older Hotel Properties
By John Tess President & CEO, Heritage Consulting Group | August 25, 2010
Tax credits need to be distinguished from tax deductions. An income tax deduction lowers the amount of income subject to taxation. A tax credit, however, lowers the amount of the tax owed. In general, a dollar of tax credit reduces the amount of income tax owed by one dollar.
The federal government offers tax credits for the rehabilitation of older buildings. There are two levels of credits, 10% and 20%. The 10% is for non-historic buildings constructed prior to 1936. The 20% is for historic structures rehabilitated using the Secretary of Interior's Standards for Rehabilitation. The percentage is of the "qualified rehabilitation expenditures."
Many think the qualifying costs are amounts spent on "restoring" the building. The term however is defined much more broadly: Qualified rehabilitation expenditures are capitalized costs associated with the work undertaken on the building, as well as direct soft costs. These costs include updated finishes, but also include upgrades for elevators, plumbing, mechanical, HVAC, electrical, fire & life safety and other less visible expenses. It also includes professional services related to the project, including architectural, engineering, legal and other fees. Qualifying expenses however do not include acquisition costs, FF&E costs, landscaping or site development costs.
There is an expenditure threshold necessary to qualify: Depending on how the rehabilitation is phased, over a 24 or 60 month period, the owner must spent the greater of $5,000 or the adjusted basis of the property on the renovation of the property. The adjusted basis is the original cost of the property reduced by depreciation and increased by capital expenditures.
Thus under the right circumstances, a hotel that is "freshened" with moderate repairs, new paint, and upgraded mechanicals can qualify for the tax credits. For a property that has been under the same ownership for several years without significant capital improvements, the threshold can be rather low.
So which is more appropriate, the 10% or 20% credit?