Historic Tax Credit Gets a Rural Boost: 30-40% Credits for Rehab Projects Starting 2026

The "Rural Historic Tax Credit Improvement Act" aims to breathe new life into rural communities by supercharging tax breaks for rehabilitating historic buildings. It's all about encouraging investment and preservation in areas that often get overlooked. Here is a breakdown of the bill:

Rehab Credit Revamp

This bill significantly upgrades the existing rehabilitation tax credit, but specifically for projects in rural areas. What does "rural" mean here? It's any place that isn't a city or town with over 50,000 people, or the urban sprawl immediately around it (using Census Bureau definitions, per Section 2). Think smaller towns and truly rural communities. The bill introduces two main credit levels:

• 40% Credit: For "affordable housing projects." (Section 2)
• 30% Credit: For all other qualifying projects. (Section 2)

There's a cap of $5,000,000 on the "qualified rehabilitation expenditures" that can be claimed for these rural projects. (Section 2). So, there's a limit to how much of the project's cost can be used to calculate the credit.

Affordable Housing Focus

To snag that higher 40% credit, a project needs to meet the definition of "affordable housing." This means either:

• At least 50% of the building's square footage is housing, and at least half of that housing is new or continued affordable housing, OR
• At least 33% of the building's total square footage is new or continued affordable housing. (Section 2)

"Affordable" is defined, in this bill, as housing for households making no more than 80% of the area's median income (using HUD's definitions). (Section 2). For example, if a developer renovates an old factory into apartments, and a significant portion is rented to those making at or below 80% of the local median income, it could qualify. There are recapture provisions in the bill. If a project stops meeting the affordable housing rules, the IRS can claw back the credit – 100% of it, in fact – if the issue isn't fixed within 45 days of being notified. (Section 2)

Credit Transfers and Basis Adjustment

The bill lets developers transfer these rural project credits to someone else. (Section 2). This is a big deal because it can make the credits more useful, especially for developers who might not have a large enough tax liability to use the full credit themselves. The transfer requires specific paperwork, including details about the project, the original taxpayer, and the new credit holder. (Section 2). The transferred credit is allowed to the transferee, and the money the original taxpayer gets from selling the credit isn't counted as taxable income. (Section 2).

Another key change: the bill eliminates the basis adjustment for these rural rehabilitation credits. (Section 3). This is a tax accounting detail, but it essentially simplifies things and can potentially improve the overall financial return on these projects.

Rollout and Real-World Impact

These changes kick in for properties placed in service after December 31, 2025. (Sections 2 & 3). This gives developers and communities some time to plan. The bill could make a real difference in smaller towns. Think of a historic Main Street building that's been vacant for years. This credit could make it financially viable to renovate it into apartments or commercial space, bringing jobs and activity back to the area. However, the $5 million cap on eligible expenses might mean that larger, more complex projects in rural areas won't get the full benefit. The "affordable housing" definition is also pretty specific, and it remains to be seen how many projects will actually fit that mold.