Getting out rehab: state tax credits for renovating historic buildings breathed new life into dying downtowns. Now they're expiring.

• Author: Lacour, Greg

On a chilly, drizzly February morning, Nathan Kirby crouches in a downtown Gastonia alleyway, screwdriver in hand. He couldn't find his drill. He labors to remove the sheet of plywood he had fixed to a doorway of a century-old neoclassical building that once was--and, Kirby believes, will be again--a limestone-and-brick jewel. The screwdriver slips from his grip. "Damn it," he mutters, then picks it up.

He pulls away the wood. The inside of the Lawyers Building is as it has been for three decades: vacant and dusty Assorted bric-a-brac--sheets of drywall, stacked doors, an old cash register--clutter the dim interior. But sunlight reveals beauty beneath the dust. Half-moon windows, heart-pine floors, buttressed ceiling. Stone-faced elevators and brass fixtures in the lobby. You realize what Kirby--a developer who specializes in renovating historic structures--sees in it and why city officials believe its $4 million renovation will spur downtown's rebirth.

"This ground floor was basically limestone. It was made with concrete and reinforced with steel, so the building is as tough as they come." Kirby, 32, is boyish and unkempt. His thinning light-brown hair is unruly. His shirt is untucked. Even in the dank cold, he eschews a jacket. "They had a nuclear-fallout shelter in the basement." It's one of the oldest and most visible buildings in downtown. "If you listen to the cries of the community, the old-timers who have been here all their lives, all you hear is, 'Nothing's going to happen downtown until the Lawyers Building gets renovated."

It's a familiar argument. Historic preservation is touted as a catalyst for downtowns, especially in small places struggling to survive population loss to big cities. To help pay for such rehabbing, the federal government enacted a historic-preservation income-tax credit town's first-floor business and retail space is occupied.

"It's a cumulative thing," says Myrick Howard, who became president of Preservation North Carolina in 1978, two years after the birth of the federal credit. In theory, the renovator of a historic building for commercial use claims 40% of qualifying expenses--20% from the federal credit and 20% from the state--as a credit on income taxes in years following the project's completion. (Rehabs for residential use get 30% from North Carolina, which added an incentive for improving mill buildings in 2006.) The benefit dwindles to about 26% after navigating tax law, Kirby says. The credits, for instance, have to be counted as added income.

Still, they've been especially popular in small and midsize towns. Hickory, with about 40,000 residents, suffers from the collapse of its once-bustling textile and furniture factories. Its unemployment rate of 7% in February exceeded the state's 6.4%. But shells of factories throughout the city are ideal candidates for...