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State agency says federal court ruling on tax credits will hurt program

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State officials say Virginia’s historic rehabilitation tax credit program is in jeopardy.  According to the Department of Historic Resources (DHR), a recent federal appeals court ruling threatens to disrupt a program that has generated $2.6 billion in rehabilitation expenditures since it began in 1996.  These investments have created construction jobs and revitalized 2,000 properties in urban cores and downtowns across Virginia.

Key to the program’s success has been the ability of investors and their partners to receive state tax credits equal to 25 percent of eligible expenses incurred in an historic rehabilitation.  Since the cost of rehab can exceed the market value of such projects, the credits help offset costs.  Plus, state credits are typically combined with a federal tax credit of 20 percent, which means a Virginia project can get up to 45 percent in combined credits.  They help attract investors through partnerships that then raise capital through the planned allocation of tax credits to the partners.

Now that arrangement is under fire. In overturning a 2009 lower court ruling, a three-judge panel of the 4th U. S. Circuit Court recently ruled that these allocations should be treated as “sales,” and taxed as income.

“I have heard from people all over the country regarding the decision,” DHR Director Kathleen S. Kilpatrick said in a statement at the agency’s Web site.  “… It will have a profoundly chilling effect on investment in historic rehabilitation and thus on our ability to achieve our policy goals for stewardship in Virginia.”

She added that future projects are at risk because the ruling takes a substantial tax bite out of the capital contributed through partnerships to a developer’s rehab project — in effect 40.7 percent of the money intended to repurpose landmark buildings disappears in tax liability (through 35% federal, 5.75% state tax rates) .

“This decision is devastating to anyone associated with the historic preservation construction industry from small contractors to architects, engineers and the building supply industry,” said William T. Frazier, a principal in Frazier Associates, located in Staunton,.

A report by Virginia Commonwealth University’s Center for Public Policy found that the program had a total economic impact of $1.9 billion from 1996 to 2009, creating 5,804 direct jobs. 

The Associated Press reported that the Virginia Attorney General’s office has filed a friend-of-the- court brief seeking a rehearing on the decision before the full appeals court.  “We have asked our Attorney General to do whatever he can to help the court understand how damaging this has been to our great program,” Kilpatrick said.

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