The Historic Rehabilitation Tax Credit (Section 47)

How it works

Section 47 gives an owner a federal income tax credit equal to 20 percent of what it costs to rehabilitate a certified historic structure used in a trade or business or held for rental. It is a credit, not a deduction: one component of the investment credit, itself one component of the general business credit.

The 20 percent is determined all at once, in the year the building is placed in service, but it is not all usable that year. Since the 2017 tax law rewrote this section, the credit is allowed ratably over the five years starting with the placed-in-service year, so one fifth of it, 4 percent of the rehabilitation spending, becomes available in each of those five years. The building's basis does not wait for that schedule: it drops by the entire 20 percent in year one, even though only a fifth of the credit has actually been allowed yet. That mismatch matters later, because the lost depreciation comes back as ordinary recapture when the building is eventually sold.

A smaller 10 percent credit used to exist for older, non-historic buildings. The 2017 law repealed it entirely, along with its own physical tests for the building's walls and framework, so every version of this credit now requires a certified historic structure. The 2025 reconciliation law I cover in my guide to that legislation did not touch this credit, or the general business credit and passive activity rules around it.

What this is worth in Florida

Every dollar of this benefit is federal. Florida has no individual income tax, so there is no state credit on top of the federal one, and the federal return is the entire story for an individual owner. Florida does offer something related but separate: a city or county can adopt an ordinance exempting as much as the full assessed value of a historic rehabilitation's improvements from property tax, for ten years, reviewed against the same Secretary of the Interior standards the federal credit uses. That is a property tax benefit, not an income tax credit, and it exists only where the local government has adopted the ordinance. I checked Florida's Income Tax Code for a state credit covering historic rehabilitation spending and found none.

Who this applies to

Two things have to be true about the property, and one about how it is used.

• The building must be a certified historic structure. Either it is individually listed in the National Register, or it sits in a registered historic district and the Secretary of the Interior has certified that specific building as contributing to the district's historic significance. Sitting inside a district's boundary line is not the test by itself, and it is the single most common misunderstanding I run into on this credit. Florida has a deep stock of National Register historic districts across its older downtowns, so the district half of this test is often already satisfied; the building-specific half is what actually decides the outcome.
• The rehabilitation has to be substantial. The spending test is a basis test, not a percentage-of-cost test: qualified rehabilitation expenditures during a 24-month period the owner selects, or 60 months for a phased project, have to exceed the greater of the building's adjusted basis or $5,000. A modestly priced building on valuable land clears this easily, since land is never part of the basis; a building bought recently at a price weighted toward the structure is the harder case.
• The building has to be income-producing. It has to be used in a trade or business, or held for rental, because the credit only reaches property on which depreciation is allowed. An owner-occupied personal residence earns nothing here, and a mixed-use building only counts the square footage used for business.

One more nuance: the National Park Service decides whether a building is historically significant and whether its rehabilitation meets the Secretary's standards, but that certification does not bind the IRS on how the credit is treated on a return. Certification and tax allowance are two separate questions that both have to go the owner's way.

What it requires

Once the building and the spending both qualify, three more layers decide whether the credit is actually usable, and in my experience this is where the real engagement lives.

What counts as a qualified rehabilitation expenditure

The base of the credit is capital-account spending on the building itself: nonresidential real property, residential rental property, or real property with a class life over 12.5 years. Excluded outright: the cost of acquiring or enlarging the building, spending on a rehabilitation that never becomes a certified rehabilitation, spending allocable to certain government or tax-exempt tenant leases once that occupancy crosses half the property, and anything not depreciated straight-line over its regular recovery period. That last exclusion has teeth: a cost segregation study that reclassifies building components into shorter recovery classes takes them out of the credit base entirely, and bonus depreciation claimed on the rehabilitation spending shrinks the credit to 20 percent of whatever basis is left afterward. One exception: lodging property is normally excluded from this family of credits, but a certified historic structure is carved back in, so historic hotels and apartments work here.

Whether the credit can actually be used: the passive activity gate

Leasing the rehabbed building to a tenant makes it a rental activity, treated as passive no matter how actively an individual owner or closely held business runs it. A passive credit is disallowed by default. A special allowance shelters the deduction equivalent of $25,000 of it, with no active-participation requirement, unlike the ordinary rental-loss version of the same allowance, but that allowance phases out for adjusted gross income between $200,000 and $250,000. It is also used up in a fixed order, passive losses first, so a rental loss from the same building can consume the whole allowance before the credit sees any of it. What is disallowed is not lost; it carries forward without any twenty-year limit until there is passive income to absorb it. The way out is to not be in a rental activity at all: operate the business directly and materially participate, or qualify as a real estate professional who materially participates in the rental.

Whether there is tax to absorb it

Even after clearing the passive activity gate, the credit has to fit under the general business credit's own ceiling: a taxpayer's net income tax minus the greater of the tentative minimum tax or 25 percent of net regular tax liability over $25,000. This credit gets a real advantage most general business credit components do not: for spending after 2007, the tentative minimum tax is treated as zero here, so the credit can offset a full year's regular tax liability, though never below zero. What still does not fit carries back one year and forward twenty. One more layer applies to an individual subject to the at-risk rules: the credit base shrinks by nonqualified nonrecourse financing, unless the building was bought from an unrelated party, the debt is at or under 80 percent of the credit base, and the lender is a qualified commercial lender or a government program.

What you need to document

This credit is won or lost on the file as much as on the law, because most of what decides it is a factual question: was the building really historic, was the spending really substantial, and was the activity really non-passive if that is the position being taken.

The certification record

The National Park Service application in its stages: evaluation of significance if not already individually listed, description of the rehabilitation work, and the final request for certification of completed work, routed first through the State Historic Preservation Officer. Nothing is a certified rehabilitation, and no credit exists, until the Park Service signs off.

A basis and spending ledger

The building's adjusted basis pinned to the start of the measuring period, and a running log of qualified rehabilitation spending kept separate from acquisition costs and any enlargement, since both are excluded no matter how the rest of the project is documented.

Proof the depreciation method matches the credit

Records showing the rehabilitation spending is being depreciated straight-line over its regular recovery period, with nothing carved out into a shorter class through cost segregation or expensed through bonus depreciation.

The financing file

Loan terms for anything nonrecourse behind the project: the lender, the loan-to-value ratio against the credit base, and whether the property was bought from a related party.

Material participation records, if the non-passive position is being taken

A contemporaneous log of hours and activity in the business run out of the building, or the records supporting real estate professional status, since this is what keeps the credit out of the passive activity limitation in the first place.

The claim itself

Form 3468, Part VII, carries the credit into the return each year of the five, then Form 3800 combines it with any other general business credits. Form 3468 is also where the project number and the date of final certification go, once they are in hand.

Where it goes wrong

Recapture is the mechanism most of these failure modes run into. If the building stops being investment credit property within five years of being placed in service, the percentage clawed back runs 100 percent in year one, then 80, 60, 40, and 20 in each following year, reaching zero after the fifth full year.

What the Tax Court said about "in the historic district"

Capitol Places II Owner, LLC v. Commissioner is the case to know, decided by the Tax Court in January 2025. The taxpayer argued that a building inside the boundary of a listed historic district was itself "listed in the National Register." The court rejected that, relying on the Keeper of the National Register's own determination that the building had never been individually listed. The case technically arises under a parallel easement-deduction definition, but the court said that definition largely tracks the one this credit uses. Being inside the district is not the test; either the building itself is listed, or the Secretary of the Interior has certified it as contributing.

The recurring mistakes

• Starting construction before the description of rehabilitation is approved. The Park Service's own rule puts that risk entirely on the owner. A denial of final certification disallows the credit for every year it was claimed; a revocation is a separate outcome, and Treasury determines its tax consequences.
• Running cost segregation or bonus depreciation across the rehabilitation spending without checking the effect on this credit first, which quietly reduces or eliminates the qualified rehabilitation expenditures behind it.
• Treating the twenty percent as available in full the year the building opens. A leased building can leave the owner using only a small fraction of it in year one if adjusted gross income is high or the activity throws off a loss, while the basis reduction happens in full regardless.
• Confusing the two carryforward periods. Credit stuck behind the passive activity rules carries forward indefinitely; credit that clears the passive rules but not the general business credit ceiling carries back one year and forward twenty. A credit tracked under the wrong one can be written off as expired years before it actually is.
• Expecting a sale of the building to free up a suspended credit. A fully taxable sale releases suspended losses, not suspended credits. The only relief available converts the remaining credit into additional basis on the sale, which means giving it up rather than collecting it.
• Donating a facade easement on the building after it is placed in service. A donation inside the five-year recapture window is treated as a disposition of the credited property, triggering the same recapture a sale would. Waiting until the building is in service to make the donation does not avoid this; it is exactly what causes it.

A situation where this comes up

The version of this credit that works the way people picture it involves an owner who buys a certified historic building downtown and runs a business out of it directly, rather than leasing it out. A restaurant or a small boutique hotel in a rehabbed historic building is a common Florida fact pattern, and because the owner materially participates in that business, the passive activity gate never comes into play; the credit can offset a full year's tax liability in real time instead of trickling in through the deduction-equivalent allowance. Reopening it usually also means hiring, and tipped staff can bring the FICA tip credit onto the same return, all pulling from the same general business credit pool this credit sits inside.

The version that worries me is the passive one: an individual who buys a historic building purely as a rental investment, expecting the full twenty percent to show up on next year's return. Above the top of the phase-out range, none of the credit is usable that year at all, and it sits suspended while the basis reduction has already happened in full. I would rather have that conversation before the building is under contract than after the return is prepared and the number does not match what was promised.