In 2006, New York became the 28th state in the nation to enact a tax incentive to encourage the rehabilitation of historic commercial and residential properties in rundown and abandoned areas.

However, limitations imposed by the initial legislation restricted the ability of the incentive to deliver on its promise - the economic and community revitalization of these neighborhoods.

Flash forward to July 2009. A bill expanding both the credit for rehabilitation of historic properties, which applied to commercial properties, and the historic homeownership rehabilitation credit, or residential credit, was approved by the Assembly and the Senate. On July 28, flanked by state, municipal and local advocates for community revitalization and historic preservation, Gov. David Paterson signed the bill, which eases the limitations that plagued the 2006 legislation.

So, what specific restrictions were changed by the now-effective 2009 law?

Credit limits

With respect to the commercial credit, the 2006 law permitted taxpayers an income-tax credit equal to 30 percent of the amount of the "federal rehabilitation credit" up to $100,000 for the rehabilitation of "certified historic structures" as that term is defined under § 47(c)(3) of the Internal Revenue Code. The amount of the "federal rehabilitation credit" is equal to 20 percent of the "qualified rehabilitation expenditures" as defined under § 47(c)(2) of the Code.

Thus, under the 2006 law, a taxpayer receiving the commercial credit received a state income-tax credit equal to 6 percent of the total qualified rehabilitation expenditures of the project, up to $100,000 in total commercial credits.

The 2009 law enhanced the commercial credit by, first and foremost, removing the 30 percent limitation. In its place, the new law entitles taxpayers to an income-tax credit equal to 100 percent of the amount of the federal rehabilitation credit, up to $5,000,000.

Thus, a taxpayer can now receive a state income tax credit equal to 20 percent of the total qualified rehabilitation expenditures capped at $5,000,000 in total commercial credits.

Therefore, the total combined value of the federal and state credits available to a rehabilitation project now equals 40 percent of the qualified rehabilitation expenditures (20 percent in federal credits and another 20 percent - capped at $5,000,000 - in state credits).

This is a tremendous increase over the total combined value of federal and state credits available under the 2006 law, which equaled 26 percent of the project's qualified rehabilitation expenditures (20 percent in federal credits and 6 percent - capped at $100,000 - in state credits).

Targeted benefits

Moreover, the 2009 changes aim to funnel the credit more effectively to properties in rundown and abandoned areas - the original target areas.

The 2009 law provides that in order to be eligible for the enhanced commercial credit, the rehabilitation must be located, in whole or in part, (a.) in a census tract where median family income is below 100 percent of the statewide median family income; (b.) a census tract in which 70 percent or more of the families have income at or below 80 percent of the statewide median income; or (c.) an area designated by the state and approved by the Department of Housing and Urban Development as an area of chronic economic distress.

Regarding the residential credit, the 2006 limitations have been expanded in a fashion similar to the commercial credit. The 2006 law permitted taxpayers owning and residing in a qualified historic home located in an area designated by the local government as in need of community renewal to claim an income-tax credit in an amount equal to 20 percent of the qualified rehabilitation expenditures, not to exceed $25,000. Credit amounts not able to be claimed were permitted be carried over to the following year or years.

The 2009 version improves on the 2006 incentives in a number of ways.

First, while the 2009 law retains the same 20 percent credit rate, it doubles the credit cap to $50,000. Additionally, the 2009 law makes the credit refundable for taxpayers whose New York adjusted gross income does not exceed $60,000 (compared to the nonrefundable credit existing under the previous law).

Lastly, the rehabilitation area is no longer limited to areas designated by the local government to be in need of community renewal. Rather, like the commercial credit, eligible rehabilitations must be located, in whole or in part, (a.) in a census tract where median family income is below 100 percent of the statewide median family income; (b.) a census tract in which 70 percent or more of the families have income at or below 80 percent of the statewide median income; or (c.) an area designated by the state and approved by the Department of Housing and Urban Development as an area of chronic economic distress.

Expected impact

According to a study conducted by HR&A Advisors of New York, these changes will generate more than $500 million of economic activity in the state and will create some 2,000 jobs.

It is important for taxpayers seeking to claim the enhanced credits under the 2009 laws to plan their development/rehabilitation timelines appropriately.

The enhanced commercial credit and the enhanced residential credit may be applied to taxable years beginning on and after Jan. 1, 2010, with the enhanced incentives schedules to expire on Dec. 31, 2014.

Christopher Ollinick is an associate with Jaeckle Fleischmann & Mugel LLP. He can be reached at collinick@jaeckle.com.