Federal Historic Rehabilitation Tax Credit: Qualifying, Applying, and Claiming

The federal historic rehabilitation tax credit is a 20% income tax credit on money you spend rehabilitating a certified historic building, available only for buildings held for business or rental use. For projects placed in service after 2017, the credit is spread evenly over five tax years, so you claim 4% of your qualified spending each year rather than the full 20% up front.¹ The program is run jointly by the National Park Service, the IRS, and your State Historic Preservation Office.²

Which Buildings Qualify

Two tests have to be met. The building has to be a certified historic structure, and it has to be used to produce income.

Certified historic structure means the building is either individually listed on the National Register of Historic Places or is a contributing building within a registered historic district. If your building sits inside a district but has never been individually evaluated, Part 1 of the application tells you whether it actually contributes to the district’s significance.³

Income-producing means commercial buildings, offices, industrial space, rental apartments, and agricultural structures. Owner-occupied homes don’t qualify. If you live in the building and it produces no rental or business income, this credit is not available to you.⁴ After rehabilitation, the building has to stay in depreciable, income-producing use for at least five years.

Mixed-Use Buildings

If part of the building is your residence and part is business space, you don’t lose the credit outright. Rehabilitation costs get allocated by square footage, and only the business-use portion generates credit. Common living areas like kitchens and bedrooms in the owner-occupied section don’t count even if you occasionally meet clients there.⁵ One trap: the substantial rehabilitation test below has to be met against the whole building’s adjusted basis, including the personal-use portion, even though only the business portion earns credit.

A separate 10% credit used to exist for rehabilitating non-historic buildings built before 1936. The Tax Cuts and Jobs Act eliminated it for expenditures after December 31, 2017. Only the 20% credit for certified historic structures is available now.

What You Have to Spend

Small cosmetic work won’t qualify. Your total qualified rehabilitation expenditures have to exceed either the building’s adjusted basis or $5,000, whichever is greater.¹ That’s what makes the rehabilitation “substantial” in the eyes of the statute.

Adjusted basis starts with what you paid for the building (not the land), plus capital improvements made since purchase, minus depreciation already claimed. Say you paid $600,000, the land was appraised at $150,000, you’ve added $40,000 in capital improvements, and you’ve taken $90,000 in depreciation. Your adjusted basis is $400,000, and your rehabilitation spending has to clear that number.

You generally have a 24-month window to hit the threshold. You pick the measuring period when you file, and it has to end with or within your tax year. For projects that are phased from the start under architectural plans, the window stretches to 60 months.¹

What Counts as Qualified Spending

Qualified rehabilitation expenditures cover the building’s structural components: walls, floors, ceilings, windows, doors, plumbing, wiring, HVAC, elevators, staircases, and fire protection. Soft costs count too when they’re properly capitalized, including architect and engineering fees, construction management, and construction-period interest and taxes.

Anything outside the building envelope doesn’t qualify. Parking lots, sidewalks, landscaping, and new additions are excluded, and so is the cost of acquiring the building itself.⁵ If the expense is about the historic building’s bones and internal systems, it probably qualifies. If it’s about the site around the building or expanding beyond it, it doesn’t.

The Work Has to Meet the Standards

Spending enough isn’t enough. Every modification has to comply with the Secretary of the Interior’s Standards for Rehabilitation, ten principles that govern how historic character is preserved while a building is updated.⁶ Reviewers look at the whole project, from window treatment to interior floor plan changes.

The guiding rule is to retain and repair original historic material rather than replace it. When replacement can’t be avoided, new materials have to match the original in design, color, and texture. New additions and exterior alterations should be compatible with the building’s scale but clearly distinguishable as new, so nobody mistakes them for original fabric. New mechanical systems are expected in most rehabs, but ductwork should be concealed and equipment placed where it doesn’t intrude on character-defining spaces.

The Three-Part Application

The application goes through your State Historic Preservation Office (SHPO) using three official forms.⁷

Part 1 establishes that the building is a certified historic structure, either individually listed or contributing to a district.
Part 2 describes the proposed rehabilitation in detail, including its impact on historic features, and requires high-resolution “before” photographs along with architectural drawings and floor plans.
Part 3 is filed after construction ends and asks NPS to certify that the completed work matches the approved plans.

Each part goes through two levels of review. The SHPO reviews first, generally within 30 days, then forwards a recommendation to NPS, which takes roughly another 30 days.⁷ Those timelines assume a complete submission. Vague descriptions like “repair windows as needed” invite requests for more information and stretch the schedule.

NPS charges processing fees tiered to the total cost of your rehabilitation, ranging from a few hundred dollars for small projects to several thousand for large ones.⁸ If NPS denies certification, you have 30 days to appeal in writing to the Chief Appeals Officer in Washington, D.C.⁹

Claiming the Credit on Your Return

Once you have final NPS certification, you claim the credit on IRS Form 3468 (Investment Credit), which flows into the general business credit.¹⁰ The 20% is allocated ratably over five tax years starting with the year the building is placed in service. A $1 million rehabilitation yields a $200,000 total credit, taken as $40,000 per year for five years.¹

You also have to reduce your depreciable basis in the building by the full amount of credit determined, which lowers your future depreciation deductions. Partnerships and S corporations file Form 3468 at the entity level and pass credit information through to partners or shareholders on Schedule K-1, and each investor then reports their share on their own Form 3468.

Passive Activity Limits

The rehabilitation credit is a passive activity credit. Individual investors generally can’t use it to offset wages, salary, or other non-passive income.¹¹

There’s a carve-out. Individuals can use up to $25,000 of rehabilitation credits (measured as a “deduction equivalent”) against non-passive income each year, and unlike the general rental real estate exception, you don’t need to actively manage the property. The $25,000 allowance phases out when adjusted gross income passes $200,000, losing 50 cents for every dollar above that, and disappears entirely at $250,000. Married taxpayers filing separately who live apart use a $12,500 allowance that starts phasing out at $100,000.¹¹

Because most individual investors run into those income limits, larger projects are typically syndicated through partnerships that bring in corporate investors, which aren’t bound by the same passive activity restrictions. Corporate partners put up capital in exchange for ownership interests and the associated credits, and that’s how the credit reaches the scale needed for major downtown rehabilitations.

The Five-Year Recapture Period

The credit comes with strings. If you sell the building or it stops being income-producing property within five years of being placed in service, the IRS claws back part or all of the credit on a sliding scale:⁵

Within year one: 100% of the credit is recaptured.
Within year two: 80%.
Within year three: 60%.
Within year four: 40%.
Within year five: 20%.

After five full years, recapture no longer applies. This clock drives the exit timing in syndicated deals, because pulling out early can wipe out the economic benefit of the credit.

Casualty events aren’t automatically forgiven. If the building is destroyed by fire, flood, or another casualty within the five-year period, recapture is triggered. If it’s only partially damaged and you repair it and put it back in service, recapture doesn’t apply. After the five-year period ends, a casualty loss carries no recapture obligation.⁵

State Credits on Top

Many states offer their own rehabilitation credits that stack with the 20% federal credit, commonly in the 20% to 25% range and sometimes higher for rural projects or affordable housing. State eligibility rules and applications don’t always mirror the federal program. If your state has a credit, line up the two applications early, because the reviews often overlap and mismatches between them cause expensive delays.

1
Office of the Law Revision Counsel. 26 USC 47 – Rehabilitation Credit
2
National Park Service. Historic Preservation Tax Incentives
3
National Park Service. Preliminary Determinations of Significance – Part 1 Application Documentation Requirements
4
National Park Service. Federal Historic Rehabilitation Tax Credit Eligibility Requirements
5
Internal Revenue Service. Rehabilitation Credit (Historic Preservation) FAQs
6
National Park Service. The Secretary of the Interior’s Standards for Rehabilitation
7
National Park Service. Historic Preservation Certification Application
8
National Park Service. Application Fees – Historic Preservation Tax Incentives
9
eCFR. 36 CFR Part 67 – Historic Preservation Certifications Under the Internal Revenue Code
10
Internal Revenue Service. 2025 Instructions for Form 3468
11
Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited