Opportunity Zones are one of the biggest tax saving concepts because investors who used capital gains to invest in an opportunity zone could avoid paying taxes on those gains for seven years. And if you kept your money in the opportunity zone investment for a decade, you wouldn’t have to pay any taxes on the gains made by that investment. We’ve also written about Opportunity Zones in this previous post.

Although much has been written about opportunity zones, it's unlikely you’ve heard much about the Historic Rehabilitation Tax Credit. And it's very unlikely you have heard anything about combining these two tax incentives together. Recently, we were involved in a historic building project in an Opportunity Zone that presented an especially distinct combination of factors.

Our project was made far more unique because it was able to combine the Opportunity Zone benefit with the historic tax credits program. The Federal Historic Preservation Tax Incentive Program has been a powerful driver of the private sector investment in rehabilitation and reuse of historical buildings since its initial launch in 1976.

This program leveraged about $89.7 billion in private investment to preserve over 43,000 historic properties to revitalize communities, create jobs, and highlight historic buildings. The centerpiece of this program, the Historic Rehabilitation Tax Credit (HTC), was launched in the 1980s under the Reagan administration and primarily offered a tax credit for 20% of qualifying rehabilitation costs on certified historic buildings 50 years and older.

If you are considering pursuing this type of development, remember these words from architect and Creature CEO Mike Gibson: “The most compelling reason to understand how to successfully execute an adaptive reuse project has to do with the fact that there is nothing more sustainable as it relates to buildings than making use of an existing building in its context.” The environmental, as well as the financial, benefits make this type of development worth accomplishing.

What Exactly is the Historic Tax Credit?

Before we dive in even further to disclose our Opportunity Zone project, let’s clear up a few details on the HTC. The HTC is—first and foremost—a tax credit. It is not a deduction and it is not an exemption. After a taxpayer accounts for all of their deductions, the credit is then applied, dollar-for-dollar, against their remaining tax liability. Also, most state tax credit programs mirror the national program, although often with different percentages.

So, how does this differ from the Opportunity Zone program? To put it simply, the Opportunity Zone program is much more reminiscent of an exemption or an elimination of tax (depending, of course, on how long the investment is held). HTC has a five-year holding period while the Opportunity Zone program has almost a 10-year holding period.

Mike Gibson says there are four phases to creating a successful historic tax credit project:

1. Create a compelling story of the building’s historical value

2. Submit project documentation (drawings and renderings) to the National Park Service

3. Build the approved project

4. Final submission of pictures and documentation of completed work

The Opportunity Zone Project: Combining HTC & Opportunity Zone Programs

When we initially began our project that intertwined the Opportunity Zone program and HTC, we needed to first determine if the target building was in an Opportunity Zone and was also on the National Register.

Unfortunately, there’s no easy, streamlined way to see if these two areas overlap. Instead, we had to research this project through a few different avenues and through a few strategized steps:

1. Determine the asset is in an opportunity zone based on resources like the Map of Opportunity Zones and the downloadable list of Opportunity Zones. Full disclosure, the map is not the easiest tool to use and isn’t intuitive.

2. Determine if the asset is on the National Register of Historic Places. This public database is searchable and allows users to filter by name or city.

3. Then, overlap the two areas. This can be exceptionally difficult when no historic district map is available. Unfortunately, there were only documents that describe the district by streets, but few have actual maps. Additional information can be searched for at each State Historic Preservation Office.

Cross-reference and research additional resources like the Advisory Council on Historic Preservation, NPS Preservation Briefs, and the National Register of Historic Places (administered under Federal Regulation 36 CFR 60).

In part 2 we will discuss the process of combining the two programs.