Financial incentives for building rehabilitation fall into four major categories: tax incentives, local incentives, low-interest loans, and grants. Typically, tax incentives, local incentives, and loans are intended for private property owners, while the vast majority of grants are for non-profit and government entities.
TAX INCENTIVES ADMINISTERED BY IL SHPO
20% federal rehabilitation income tax credit for rehabilitating historic, income-producing properties.
Click here for more information on the 20% federal credit.
25% state rehabilitation income tax credit for rehabilitating historic, income-producing properties in River Edge Redevelopment Zones (only Aurora, East St. Louis, Elgin, Peoria, and Rockford).
Click here for more information on the River Edge Historic Tax Credit.
Property Tax Assessment Freeze program for historic, owner-occupied residences.
Click here for more information on the Assessment Freeze program.
25% state rehabilitation income tax credit for rehabilitating historic, income-producing properties. Eligible expenditures must be incurred between January 1, 2019 and December 31, 2023.
Click here for information on the Illinois Historic Preservation Tax Credit.
Released on May 1, 2023, the report The Impact of Historic Tax Credit Investment in Illinois found that the two state tax-credit programs (Illinois Historic Preservation Tax Credit and the River Edge Historic Tax Credit) are powerful economic-development and job-growth tools for Illinois at both the local and state levels. Twenty cities across fourteen counties benefitted from a Statewide or River Edge Historic Tax project. Besides bringing underutilized historic buildings back on the tax rolls and helping revitalize historic downtowns and neighborhoods, these state tax credits leverage substantial investments of private capital.
FINANCIAL INCENTIVES ADMINISTERED BY OTHERS
There are several other tax incentives that IL SHPO does not administer that may be helpful to owners of historic buildings. Eligibility and application requirements vary accordingly. Please contact the respective organization for additional information.
INCOME TAX CREDITS
Affordable Housing Income Tax Credits
The Illinois Housing Development Authority (IHDA) administers two income tax credits that can assist in creating affordable housing.
Low Income Housing Tax Credit (federal income tax credit)
Illinois Affordable Housing Tax Credit (state income tax credit)
Developers often pair these credits with the 20% federal rehabilitation tax credit when they rehabilitate a historic building that will contain affordable housing units. For more information on affordable housing tax credits, click here to visit IHDA’s website. The IRS has prepared this document comparing the federal 20% historic tax credit with the federal Low Income Housing Tax Credit. Utilizing either of these two affordable housing tax credits (regardless of whether one is also applying for the 20% federal rehabilitation tax credit) triggers IL SHPO’s regulatory program. Click here for more information on IL SHPO’s regulatory program.
10% Rehabilitation Income Tax Credit for Non-Historic Buildings Built Before 1936
On December 22, 2017, Public Law No: 115-97 (Pub. L. 115-97) was signed and enacted, amending the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. Pub. L. 115-97 repeals the 10% Rehabilitation Tax Credit for non-historic buildings and modifies the 20% Historic Rehabiliation Tax Credit.
This federal income tax credit is administered by the IRS and does not involve a review by IL SHPO. This program reduces the building owners’ federal income taxes by 10% of the cost of rehabilitating a ‘non-historic’ building built before 1936.
To be eligible, buildings must not be listed on the National Register.
To qualify, the building must have income-producing, non-residential uses. Apartments and owner-occupied housing are not eligible uses.
After claiming the credit, owners must retain the building for 5 years or return a pro-rated portion of the credit.
Owners must spend more than $5,000 or the Adjusted Basis, whichever is larger, during a 24-month period. Adjusted Basis is the current value of a building. The value is specific to each building, taking into account purchase price, land value, annual depreciation and depreciated capital improvements. Please contact your accountant to determine your building's Adjusted Basis.
Eligible expenditures may include:
Architectural and construction costs on the historic building.
Soft costs that are depreciable rather than taken as a one-time expense: architectural and engineering fees, survey, legal, development fees, construction-related costs.
Ineligible expenditures include acquisition, furnishings, new additions, landscaping, or site improvements.
Building must pass a physical retention test:
50% of exterior walls must remain as exterior walls; and
75% of exterior walls must remain as exterior or interior walls; and
75% of building’s internal structure must remain.
50% Disabled Access Income Tax Credit
This IRS program reduces the building owners’ federal income taxes by 50% of the amount spent making a business handicap accessible, to a maximum of $5,000 of credit per year. Click here to download Form 8826 and its instructions.
For rehabilitating existing buildings that house small businesses that
pay or incur expenses; and
have less than $1 million in gross receipts in preceding year; or
have fewer than 30 full-time employees in preceding year.
Expenses must enable the eligible small business to comply with the Americans with Disabilities Act of 1990. Work must meet current ADA Standards. Eligible expenses include installing ramps, restrooms, elevators, sidewalks or walkways, and the redesign of entries and interior circulation.
Credit may be taken on work expenditures between $250 and $10,250.
A maximum of $5,000 of credit may be taken each year. Credits may be claimed in more than one tax year, provided that the expenses claimed were made in the current tax year.
New Markets Income Tax Credits
This program provides a credit to the investor that totals 39% of the cost of the investment and is claimed over a 7-year credit allowance period. U.S. Treasury’s Community Development Financial Institutions (CDFI) Fund allocates the New Markets Tax Credit (NMTC) Program, which permits taxpayers to receive a credit (typically 5% to 6% of the amount invested in a distressed area) against federal income taxes for making qualified equity investments in designated Community Development Entities (CDEs). Click here for more information about New Markets Tax Credits.
- Substantially all of the qualified equity investment must be used by the CDE to provide investments in low-income communities.
- In each of the first 3 years, the investor receives a credit equal to 5% of the total amount paid for the stock or capital interest at the time of purchase. For the final 4 years, the value of the credit is 6% annually.
- Investors may not redeem their investments in CDEs prior to the conclusion of the 7-year period.
OTHER TAX INCENTIVE PROGRAMS
Cook County Class "L" Property Tax Incentive
Under the Class “L” program, owners of qualifying commercial and industrial properties designated as “landmarks” and undergoing “substantial rehabilitations” can have their property tax assessment levels reduced for a twelve-year period. Where commercial and industrial properties are typically assessed at 25% of market value, Class L buildings are assessed at only 10% for ten years, 15% in year 11 and 20% in year 12. To qualify, owners must invest at least 50% of the Assessor’s full market value of the landmark building in an approved rehabilitation project and must be determined a Class “L” property prior to the commencement of construction. The land portion of the assessment is also eligible for the incentive if the building has been vacant or unused continuously for the prior two years. For more information about the incentive and requirements, click here to visit the website of Chicago’s Historic Preservation Division of the Department of Planning and Development.
A preservation easement is a voluntary legal agreement between a property owner and a preservation organization to preserve and protect all open-air sides of a historic structure. Under current tax laws, an easement donation may qualify as a charitable contribution, with federal income-tax benefits, based on the value of the easement, as determined by a qualified appraiser.
Landmarks Illinois is the state’s leading non-profit preservation advocacy organization, and it accepts preservation easements. For more information on preservation easements, click here to visit Landmarks Illinois’ website.
- Building must be a certified historic structure in one of the following three ways:
- individually listed on the National Register of Historic Places; or
- a contributing property within a National Register Historic District; or
- a contributing property within a local historic district that has been certified by the National Park Service.
- The easement is granted in perpetuity and recorded against the deed.
- The portion of the building property rights that are donated are monitored and protected by the preservation organization. The owner seeks approval from the easement holder prior to construction.
- At the time of donation, the donor also gives a one-time, tax-deductible charitable contribution to assist with the costs of monitoring and defending the easement in perpetuity.
- Owners taking the federal tax credit must wait until the 5-year recapture period has elapsed before pursuing an easement donation.
Architectural and Transportation Barrier Removal Income Tax Deduction
This IRS deduction is located within the same program as the 50% Disabled Access Tax Credit described above. Click here to download Form 8826 form and instructions. See also Chapter 11 in Publication 535, Business Expenses.
This is a deduction (not a credit) of up to $15,000 per year of the costs of making a facility or public transportation vehicle more accessible to and usable by persons who are disabled or elderly by removing barriers.
- Cannot deduct costs to completely renovate or build a new facility or public transportation vehicle, or to replace depreciable property in the normal course of business.
- Can add any costs over this limit to the basis of the property and depreciate the annual $15,000 tax deduction.
Local incentives are designed by individual communities to encourage specific renovation programs. Grants and low-interest loans can be funded from special taxes or economic development districts, such as Tax Increment Financing (TIF) districts and Special Service Areas (SSA). The TIF district collects increased property-tax revenue from a specially defined district over a specific numbers of years. SSAs collect a special tax on properties in the district. The moneys collected must be reused to improve the district in which they were collected. Other communities have been designated as state or local economic development or empowerment zones that can provide for financial incentives for district improvements.
Matching grants and low-interest loans derived from TIF or SSA funds can supplement the federal tax credits and can often apply to projects not eligible for the credits. Grants may be given to eligible applicants for façade renovations, exterior maintenance, new signage and interior remodeling.
Low-interest loans enable owners to borrow money to rehabilitate historic buildings usually at a reduced interest rate.
203(k) Rehabilitation Loan Program
This program allows a qualifying private owner to borrow a single, long-term mortgage loan to finance both the acquisition and rehabilitation of an existing home. Administered by the US Department of Housing and Urban Development (HUD). For more information, click here to visit HUD’s 203(k) website.
- The mortgage amount is based upon the projected value of the property with the work completed, taking into account the cost of the work.
- Can also be used to refinance the mortgage on a home one already owns in order to rehabilitate it.
- Cannot be used for rehabilitating properties for resale
Most grants are for publicly owned or non-profit-owned buildings and may be geared for specific building or occupancy types. They offer lump sums of money for specific rehabilitations. They can involve stringent qualifying criteria and can be competitive.
Landmarks Illinois Grant Programs
Landmarks Illinois, the state’s leading preservation non-profit advocacy organization, administers two grant programs to assist historic structures. Click here for more information on Landmarks Illinois’ Barbara C. and Thomas E. Donnelley II Preservation Fund and the Preservation Heritage Fund.
National Trust for Historic Preservation Grant Program
The National Trust for Historic Preservation offers National Trust Preservation Funds and several more specific grant programs for historic preservation activities. Click here for more information on the Trust’s grant program.