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Owner-occupied residential properties = $25,000,000.00+ annual Rehabilitation Tax Credit funding!
If you reside at your property, are committing to spending $20,000 or more to rehabilitate your property, and know that the property is listed on the National Register of Historic Places (NRHP)*, then the State Tax Credit program may be right for you!
*If you're unsure if your property is listed on the NRHP, you may search for your property here, or contact Marty Perry with your property address for confirmation. The property must be on the NRHP as an individual historic resource or as a contributor to a National Historic District, to qualify for the program.
The Owner-Occupied State Tax Credit offers a 30% credit on the project's Qualified Rehabilitation Expenses ("QREs"). What that means is, if you spend $100,000 in qualifying expenses to rehabilitate your property, you'd receive a $30,000 credit toward your State Income Taxes. The State Credit is refundable, so if your credit exceeds the amount you owe in income taxes, you'll receive a refund of the difference.
Minimum QRE investment: $20,000
Maximum QRE investment, eligible for Credits: $400,000
Reference: KRS 171.397(3)(a).pdf
What is a Qualifying Rehabilitation Expense (QRE)?
"Qualifying Rehabilitation Expenses" or "QREs" are project expenses that are eligible for Rehabilitation Tax Credits. QREs include labor and material fees related to a capital improvement that meets the Standards for Rehabilitation and goes toward the basis of the historic building or structure. Although your application should outline ALL work proposed at the property, not all expenses may be eligible for the credit(s). See below.
For example: Driveways, yard features, and new construction that do not contribute to the preservation of existing historic material and features would not be considered QREs. Similarly, temporal features or fees that are not capital improvements, are not eligible, such as: appliances (stoves, washers, etc.), furniture, taxes and utilities, and window coverings (blinds and drapery), among others.
Another example: Window repair (material and labor) would be considered a Qualifying Rehabilitation Expense. However, removal and replacement of historic windows that are in repairable condition, would not be considered a Qualifying Rehabilitation Expense, as this does not meet the Standards for Rehabilitation's guidance for repair over replacement, where possible. In fact, removal of historic windows without prior approval in a Part 2 application from the Kentucky Heritage Council is subject to a project's disqualification or denial.
The entire process includes three application forms, a plan, and lots of photos. All applications and forms necessary to complete your project are located on the Rehab Tax Credit homepage.
Parts 1 and 2, are typically submitted simultaneously, although it is not a requirement. Part 1 and Part 2 applications must be submitted prior to an Allocation Letter being issued to the applicant. See more about the Allocation Letters, below, in the "What's the Timeline?" section.
1. Project Received:
When a project's Part 1 and Part 2 applications are submitted, KHC reviews the applications and determines if any information is missing (including the Part 2 Fee). If any components of the application is missing, the applicant will be notified via email of the missing or insufficient information and given a deadline to submit missing elements. Incomplete applications will not be accepted. Incomplete applications will not be stored by the KHC beyond 30-days; if the applicant would like to retrieve their incomplete application materials, they can do so by visiting our office (see Section 4(4)(a) of KAR 300.006.011 for more information).
2. Project Accepted:
Once the Project has been deemed accepted (meaning, it has all of the necessary submittal materials and fee paid), it will be assigned to a Site Development Project Manager. Applications are equitably assigned based on their accepted date and Project Manager's caseloads. Those projects which were accepted first, shall be assigned first, when one of the Project Managers has capacity for an additional project. The assigned Project Manager will review the Tax Credit application and be in contact if any questions or comments arise. The Project's Part 1 and Part 2 applications will receive preliminary approval by the Kentucky Heritage Council once the Project Manager has completed their analysis of the project, regardless of the Allocation Letter's issuance.
3. Project Approvals:
Part 1 & 2 Application approvals allow the applicant to begin the Rehabilitation Project. These can be issued at any time, regardless of the Allocation Letter's timeline (see "Step 4. Project Allocations," below, for additional information).
Once approval has been issued, an applicant has a consecutive 24-month period to charge and itemize their Qualifying Rehabilitation n Expenses ("QREs") and a consecutive 36-month period to submit a Part 3 Application (certifying the work is complete and outlining the QREs for Tax Credit approval).
Only the qualifying expenses within the 24-month consecutive period are eligible for Tax Credits. No allowances are made in the State Tax Credit for "phased projects," so each State Tax Credit project's eligible expenses should be self-contained within a 24-month period, and at least one expense must take place within the project's Allocation Year. In some cases, Federal applications can have a "phased" option. Ask KHC staff if you have additional questions.
4. Project Allocations:
An Allocation Letter informs the applicant how many Tax Credit dollars have been set aside for their project, based on their Part 2 "Estimated QREs," from the annual funding. If the KHC receives more QRE requests than funding allows, ALL projects' allocated tax credits will be portioned equitably (i.e. no one gets left out, but everyone gets a slightly smaller slice of the pie).
The deadline to be within a certain Allocation Year (which may be important for the project's 24-month expense period), is April 29th of that year. The State's annual funding (of $100 Million per year) is divided up to each project that is accepted within the fiscal calendar. Because of the state's budget and associated fiscal calendar, applications received between April 30th and April 29th of the following year will be considered part of the latter-year's pool of applicants (see example below for clarification). Applicants will have "Allocation Letters" sent to them on June 29th of the fiscal year they apply within, informing them of how much credit has been set aside for their specific project from the annual fund.
Property owners that receive the tax credit(s) are subject to monitoring, property inspection, and repeal of the Rehabilitation Tax Credits for three years after the credit is awarded. Applicants are urged to seek the advice of a qualified tax professional before proceeding with any tax credit project.