Historic Preservation Tax Credits: Application, Claiming, and Recapture

The federal historic preservation tax credit is worth 20 percent of what you spend rehabilitating a certified historic building, claimed in equal 4 percent installments over five tax years starting when the building is placed in service.¹ The building has to be income-producing after the work is done, the rehabilitation has to follow the Secretary of the Interior’s Standards, and your spending has to clear a threshold tied to the building’s adjusted basis. The National Park Service certifies the project; the IRS delivers the credit. Thirty-eight states run their own historic credits that stack on top.

One boundary worth stating up front: an owner-occupied home you live in and don’t rent out doesn’t qualify. The credit is for depreciable property used in a trade, business, or income-producing activity.²

Which Buildings Qualify

A building is a “certified historic structure” if it’s individually listed in the National Register of Historic Places, or if it sits inside a registered historic district and the National Park Service certifies that it contributes to the district’s historic character.² Registered historic districts include National Register districts and state or local districts that the Secretary of the Interior has certified.

After the work, the building has to be depreciable and used to produce income. Commercial offices, retail space, industrial buildings, agricultural buildings, and rental apartments all fit. The property must stay in qualifying use for five years after you first claim the credit, or you’ll face recapture.

The Substantial Rehabilitation Test

A cosmetic refresh won’t get you the credit. Under IRC Section 47, your qualified rehabilitation expenditures have to exceed the greater of the building’s adjusted basis or $5,000.³ For anything worth doing, adjusted basis is the number that matters. That’s the cost of the building (excluding the land), plus capital improvements, minus depreciation already taken. Your county assessor can supply a building-to-land ratio if you need one.⁴

You have to hit that spending threshold inside a 24-month window you choose, ending with or within the tax year you claim the credit. For a phased project with architectural plans and specifications completed before work begins, the window stretches to 60 months.³

What Spending Counts

Qualified rehabilitation expenditures are amounts properly chargeable to a capital account and tied to work on the historic building itself. That covers structural components (walls, floors, ceilings, windows, roofing, staircases) and mechanical systems (heating, air conditioning, plumbing, electrical wiring), along with architect fees, engineering costs, and construction-period interest.

Several categories don’t count:

Acquisition costs, meaning the price you paid for the building or any interest in it.⁵
Enlargements. Any work that makes the building physically bigger, like a new wing or an added story.
Site work. Landscaping, parking lots, sidewalks, anything outside the walls.
Costs allocable to portions of the building used by tax-exempt entities beyond certain thresholds.
Lessee expenditures where the remaining lease term (ignoring renewal options) is shorter than the recovery period under the depreciation rules.

All the work has to comply with the Secretary of the Interior’s Standards for Rehabilitation, codified at 36 CFR Part 67. The ten standards are meant to preserve a building’s historic character while adapting it for a new or continuing use.⁶ A project that fails to meet them won’t be certified no matter how much you spent.

The Three-Part NPS Application

Certification runs through the National Park Service on a form called the Historic Preservation Certification Application, submitted first to your State Historic Preservation Office, which forwards it to the NPS.⁷ It comes in three parts.

Part 1: Evaluation of Significance

Part 1 establishes that the building is a certified historic structure. You submit a historical description, current photographs, and documentation of architectural features. If the building is already individually listed on the National Register, this step is straightforward. If it’s in a district but hasn’t been individually evaluated, this is where the NPS decides whether it contributes.

Part 2: Description of Rehabilitation

Part 2 sets out the proposed work in detail, with drawings, floor plans, and a narrative explaining how historic elements will be protected or repaired. The Form 3468 instructions recommend submitting this before physical work begins.¹ You can legally start construction earlier, but if the NPS later decides the work doesn’t meet the Standards, certification won’t come and the credit disappears.

Part 3: Request for Certification of Completed Work

After the renovation is finished, Part 3 documents what got built, with “after” photographs matching the approved plans. The NPS issues a final certification if the work complies, and that certification is what allows you to claim the credit.⁷

Reviews for Parts 1 and 2 typically run about 30 days at the state level and another 30 at the federal level when the application is complete. Incomplete submissions or projects with preservation concerns take longer.

Application Fees

The NPS charges a review fee tied to total rehabilitation costs, split between Part 2 and Part 3. Projects under $80,000 pay nothing. Between $80,000 and $3,849,999, the fee is $845 plus 0.15 percent of costs above $80,000. Projects at $3,850,000 or more pay a flat $6,500.

If your final costs on Part 3 come in below your Part 2 estimate, the Part 3 fee is recalculated on the lower figure, though nothing is refunded for the Part 2 portion. If final costs come in higher, you owe the difference with Part 3. Phased projects and historically related multi-building projects are assessed on total costs across all phases or buildings.

Claiming the Credit on Your Return

You report the credit on IRS Form 3468 (Investment Credit), filing a separate form for each property. From there it flows into Form 3800 (General Business Credit) and reduces your income tax.¹ Enter only the 4 percent annual installment each year, not the full 20 percent. The five-year ratable schedule replaced the old rule that let you claim the full credit in the year the building was placed in service; that change took effect with the Tax Cuts and Jobs Act in 2018.

The credit itself can’t be bought or sold between taxpayers. Investors typically participate through partnerships that allocate qualified rehabilitation expenditures to the partners, which is how syndicated historic tax credit deals are structured.⁴

Passive Activity Rules for Individual Investors

For most individuals, the rehabilitation credit is a passive activity credit and generally offsets only tax on passive income. IRC Section 469(i) carves out a special allowance: individuals can apply up to $25,000 of passive rental real estate losses and the deduction equivalent of passive credits against non-passive income like wages.⁸

The rehabilitation credit gets more favorable phase-out treatment than the general rule. For most passive investors, the $25,000 allowance starts phasing out at $100,000 of adjusted gross income and disappears at $150,000. For the rehabilitation credit, the phase-out starts at $200,000 and doesn’t end until $250,000. The rehabilitation credit also doesn’t require “active participation” in the rental activity to use this allowance. Investors above $250,000 who aren’t real estate professionals can carry unused credits forward to offset future passive income or to use when the property is sold.

Recapture if You Exit Early

Sell the building, convert it out of income-producing use, or otherwise stop using it as investment credit property within five years of placing it in service, and the IRS reclaims part of the credit.⁹ The recapture percentage steps down each year:

Within one year of placing in service: 100 percent
Within two years: 80 percent
Within three years: 60 percent
Within four years: 40 percent
Within five years: 20 percent

After five full years, no recapture applies. The recaptured amount is added to your tax bill for the year the property stops qualifying. If your exit strategy involves selling in the first few years, run the recapture math before assuming the credit makes the project work.

State Historic Tax Credits

Thirty-eight states offer their own historic preservation tax credits that stack on top of the federal 20 percent. Percentages, eligibility rules, and caps vary. Some states offer 20 to 25 percent; a handful go higher for projects in rural communities or those producing affordable housing. A few allow their credits to be transferred or sold, which makes them useful even to owners without enough state tax liability to absorb the full credit.

State programs generally follow the federal framework, requiring National Register listing and compliance with the Secretary of the Interior’s Standards, but they often run their own application processes, fee schedules, and annual program caps. Combined with the federal credit, a state credit can make a rehabilitation project pencil out when neither alone would. Contact your State Historic Preservation Office early, because some state programs have limited annual funding awarded on a first-come basis.

1
Internal Revenue Service. Instructions for Form 3468 (2025)
2
National Park Service. Eligibility Requirements – Historic Preservation Tax Incentives
3
Office of the Law Revision Counsel. 26 U.S. Code 47 – Rehabilitation Credit
4
Internal Revenue Service. Rehabilitation Credit (Historic Preservation) FAQs
5
Legal Information Institute. 26 U.S. Code 47(c)(2) – Definition of Qualified Rehabilitation Expenditure
6
National Park Service. The Secretary of the Interior’s Standards for Rehabilitation
7
U.S. National Park Service. Historic Preservation Certification Application
8
Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited
9
Office of the Law Revision Counsel. 26 U.S. Code 50 – Other Special Rules