The Certified Rehabilitation tax credit is refundable, however; if the tax credit is transferred or allocated, it becomes a nonrefundable credit that may be applied against income taxes imposed by KRS 141.020 (individual income tax) or KRS 141.040 (corporation income tax) and the limited liability entity tax (LLET) imposed by KRS 141.0401 with the ordering of credits as provided in KRS 141.0205. For applications received on or after April 30,2026, but before April 15, 2027, and on or after each April 15 thereafter, this credit is also allowed against taxes imposed in KRS 136.320, 136.330, 136.340, 136.350, 136.370, 136.390, 304.3-270. If the taxpayer is a pass-through entity not subject to the tax imposed by KRS 141.040, the taxpayer shall apply the credit at the entity level against LLET imposed by KRS 141.0401 and shall also pass the credit through in the same proportion as the distributive share of income or loss.
The overall cap for the certified rehabilitation tax credit increased to $100 million for applications received on or after April 30, 2026. For applications received before April 30, 2026, 25% of the credit cap is allocated to owner-occupied residential property. For applications received on or after April 30, 2026, 15% of the credit cap is allocated to owner-occupied residential property.
Transferred credit is nonrefundable and may be carried forward 7 years after project completion. For applications received before April 30, 2026, the credit may be transferred to a financial institution subject to the taxes imposed by KRS 136.505, 141.040, or 141.0401. Beginning with applications received on April 30, 2026, and after, the credit may be transferred to taxpayers subject to taxes imposed in KRS 136.320, 136.330, 136.340, 136.350, 136.370, 136.390, 304.3-270, 141.020 or 141.040 and 141.0401.
The Department of Revenue shall assess a penalty in an amount equal to 100% of the tax credit allowed on the rehabilitation on any taxpayer or exempt entity that:
- Performs disqualifying work as determined by the Kentucky Heritage Council on a certified historic structure for which a rehabilitation has been certified; and
- If credit allowed based on affordability, fails to maintain compliance with the commercial residential property requirement established in KRS 171.396(5) as determined by the Kentucky Heritage Council and the Kentucky Housing Corporation.
Effective for taxable years beginning on or after January 1, 2027, but before January 1, 2031
- A taxpayer completing a certified rehabilitation of a certified historic structure containing a minimum of twenty-five stories shall be allowed a tax credit for projects in which the total qualified rehabilitation expenses exceed $150,000,000.
- The credit is equal to the lesser of the percentage of qualified rehabilitation expenses as provided in KRS 171.398 or the amount of federal credit allowed under 26 U.S.C. sec. 47 for the same qualified rehabilitation expenses that generated the tax credit.
- The credit shall not exceed $40,000,000 or be subject to the maximum credit amounts allowed in KRS 171.398.
Application Process
The application process begins with the Kentucky Heritage Council (KHC). The KHC determines what properties qualify for the credit, the guidelines for each property and if the credit will be used for the rehabilitation of a residence or commercial property located in a historic district. On or after April 30, 2026, a taxpayer seeking the credit shall file an application for a preliminary determination of maximum credit eligibility before April 15 or August 15 of the year in which the proposed project will begin. After certification of the credit is received, a copy of the letter must be filed with the income tax return to determine the credit against the income tax liability and the LLET.
Who Can Claim the Credit?
Pass-through Entities
Tax credits that are transferred or allocated may pass through to the partners, members, or shareholders of a pass-through entity that are the partners, members, or shareholders at the time of the application and subsequent approval of the credit in the year the project was completed. The income is reported on the Kentucky Schedule K-1 and any credit that is passed through to the members, partners, or shareholders may be used against individual income tax or corporate income tax and LLET.
Individuals
A sole proprietor reporting business income on Schedule C (federal Form 1040) may claim the credit. An individual may also claim the credit if it is passed through to them from a partnership, LLC, or S-Corporation on a Kentucky Schedule K-1.
An individual may also claim the credit on their individual income tax return. In the case of two spouses filing separate returns or filing separately on a joint return, the credit may be taken by either or divided equally. If the application lists only one of the spouse’s names, the listed spouse is entitled to claim full credit.
Corporations
A corporation may apply the certified rehabilitation tax credit against income tax and LLET on its Kentucky Corporation Income Tax and LLET Return. A corporation may also claim the credit if it is passed through to them from a pass-through entity on a Kentucky Schedule K-1.