Texas has one of the strongest historic preservation tax credit programs in the country, and when combined with the federal Historic Tax Credit, real estate developers can recover a significant portion of rehabilitation costs on qualifying historic buildings. For developers working with older buildings in Texas downtowns, warehouse districts, and historic neighborhoods, these credits can fundamentally change project economics.
The Two Historic Tax Credits
Federal Historic Tax Credit (HTC)
The federal HTC provides a 20% income tax credit on qualified rehabilitation expenditures (QREs) for certified historic structures. The building must be listed on the National Register of Historic Places (individually or as a contributing building in a historic district), and the rehabilitation must follow the Secretary of the Interior's Standards for Rehabilitation.
- Credit amount: 20% of qualified rehabilitation expenditures
- Claiming period: Claimed ratably over 5 years
- Requirements: National Register listing, substantial rehabilitation (QREs must exceed the greater of $5,000 or the adjusted basis of the building), income-producing use
- Review: National Park Service reviews and certifies the rehabilitation
Texas Historic Rehabilitation Franchise Tax Credit
Texas offers a state-level credit of 25% of eligible rehabilitation costs against the Texas franchise tax. This is one of the most generous state historic tax credits in the country. The Texas credit applies to buildings designated as Recorded Texas Historic Landmarks, State Antiquities Landmarks, or listed on the National Register of Historic Places.
- Credit amount: 25% of eligible rehabilitation costs
- Administered by: Texas Historical Commission in partnership with the Texas Comptroller
- Transferable: The Texas credit can be transferred or sold to other franchise taxpayers, making it valuable even for developers without Texas franchise tax liability
- Requirements: Historic designation, rehabilitation meeting Secretary of the Interior's Standards, minimum expenditure thresholds
Combined Credit Value
For a qualifying project, the combined federal (20%) and Texas (25%) historic tax credits can offset up to 45% of eligible rehabilitation costs. On a $2 million rehabilitation, that translates to up to $900,000 in tax credits — a significant factor in project feasibility.
What Qualifies as a Rehabilitation Expenditure
- Structural work (foundations, walls, roofs, floors)
- Mechanical systems (HVAC, plumbing, electrical, fire protection)
- Interior finishes (walls, ceilings, flooring)
- Windows and doors (repair or replacement meeting historic standards)
- Exterior restoration (masonry repair, facade restoration)
- Architectural and engineering fees related to the rehabilitation
- Construction management and general conditions
What Does Not Qualify
- Land acquisition costs
- New construction (additions to the building)
- Furniture, fixtures, and equipment
- Landscaping and site work
- Costs related to parking structures
Types of Projects
Historic tax credits are commonly used for:
- Adaptive reuse: Converting historic warehouses, factories, schools, or commercial buildings into apartments, offices, hotels, or mixed-use developments
- Downtown revitalization: Rehabilitating historic Main Street buildings for retail, restaurant, and office use
- Hotel conversions: Converting historic buildings into boutique hotels
- Office rehabilitations: Modernizing historic office buildings while preserving their character
- Multi-family housing: Creating apartments or condominiums in historic buildings
Texas Markets with Strong Historic Stock
- San Antonio: Extensive historic districts including the King William District, Southtown, and downtown commercial areas
- Galveston: One of the largest collections of historic buildings in Texas, with significant Victorian and commercial architecture
- Houston: Historic warehouse districts, Heights neighborhood, and downtown commercial buildings
- Dallas: Deep Ellum, West End, and downtown historic commercial buildings
- Fort Worth: Stockyards, Sundance Square area, and South Side historic buildings
- Austin: Sixth Street, Congress Avenue, and East Austin historic properties
- Small towns: Many Texas small towns have historic courthouse squares and Main Street buildings eligible for credits
How the Process Works
- Identify the building's historic status: Determine whether the building is listed on the National Register, is a Recorded Texas Historic Landmark, or is a contributing building in a historic district. If not listed, you may be able to apply for listing.
- Submit Part 1 (federal): For the federal credit, submit a Part 1 application to the National Park Service through the Texas Historical Commission to confirm the building's historic significance.
- Design the rehabilitation: The rehabilitation must meet the Secretary of the Interior's Standards. Work with an architect experienced in historic preservation.
- Submit Part 2 (federal): Submit the proposed rehabilitation plan for NPS review before construction begins.
- Apply to THC (state): Submit the state credit application to the Texas Historical Commission.
- Complete the rehabilitation: Execute the work according to the approved plans.
- Submit Part 3 (federal): After completion, submit documentation that the work was completed as approved.
- Claim the credits: The federal credit is claimed on your income tax return. The Texas credit is claimed on your franchise tax return or transferred to another taxpayer.
Layering with Other Incentives
- Opportunity Zones: If the historic building is in a designated Opportunity Zone, investors can defer and potentially reduce capital gains taxes on top of the historic credits. Full guide to Texas real estate tax credits.
- New Markets Tax Credit: For projects in low-income census tracts, NMTC can provide an additional 39% credit over 7 years
- LIHTC: For affordable housing components, the Low-Income Housing Tax Credit can be layered with historic credits
- Local property tax abatements: Many Texas cities offer property tax abatements for historic rehabilitation
- TIRZ/TIF: Tax Increment Reinvestment Zones can provide additional public financing for infrastructure related to historic projects
Common Mistakes
- Not applying before construction: Federal Part 2 approval should be obtained before construction begins. Starting work before approval creates risk.
- Non-compliant rehabilitation: The Secretary of the Interior's Standards are specific about how historic elements must be treated. Using incompatible materials, removing historic features, or making inappropriate alterations can disqualify the project.
- Missing the substantial rehabilitation test: QREs must exceed the adjusted basis of the building. Verify this threshold early in project planning.
- Not engaging a preservation architect: Historic rehabilitation requires specialized expertise. Standard architects may not be familiar with the Secretary's Standards or the review process.
Bottom Line
Historic tax credits are one of the most powerful tools available to Texas real estate developers working with older buildings. The combined 45% credit (20% federal + 25% Texas) can make rehabilitation projects feasible that would otherwise be uneconomic. If you are considering a project involving a historic building in Texas, evaluate the credit early — it can fundamentally change your project's financial model.
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