California’s Historic Tax Credit Gets a Reset, Not Just a Renewal: What AB 1265 Changes

California’s Historic Rehabilitation Tax Credit was on track to expire at the end of 2026, the way its authorizing statute always said it would. AB 1265, passed unanimously by both chambers of the Legislature and sent to Governor Newsom’s desk on August 31, lets that expiration happen on schedule, then puts a new version of the credit in its place starting in 2027. It’s not a simple extension with a rate bump. Developers who’ve built deals around the current program’s enhanced rates and guaranteed annual allocation should look closely at what the replacement actually looks like, because several of the mechanics change.

How the Credit Works Today

For taxable years beginning on or after January 1, 2021 and before January 1, 2027, California’s Historic Rehabilitation Tax Credit allows a base credit of 20% of qualified rehabilitation expenditures on a certified historic structure, increased to 25% if the project meets one of five criteria: it sits on surplus federal, state, or local property; it includes affordable housing for lower-income households; it’s in a designated census tract; it’s part of a military base reuse authority; or it’s a transit-oriented development within a half-mile of a transit station. A separate credit, worth between ​$5,000 and ​$25,000, is available to owner-occupants rehabilitating a qualified residence. Statewide allocations are capped at ​$50 million a year, with ​$2 million set aside for qualified residences and ​$8 million set aside for smaller projects under ​$1 million, administered by the California Tax Credit Allocation Committee working with the Office of Historic Preservation. [Cal. Rev. & Tax. Code §§ 17053.91 & 23691].

AB 1265 Lets the Old Program Expire, Then Replaces It

Rather than amending the existing credit in place, AB 1265 lets the current statute sunset on its own terms on January 1, 2027, and enacts a new, separate credit for taxable years beginning on or after January 1, 2027 and before January 1, 2032. As introduced, the bill would have amended Sections 17053.91 and 23691 directly; as passed, it instead amends Section 17053.91 and adds two new sections, 17053.92 and 23692, which sunset by their own terms at the end of the new credit period. That structural choice matters: this is a full swap of one credit regime for another, not a rate adjustment layered onto the program developers know today.

What’s Different Starting in 2027

The new credit is flat and simpler on paper, but narrower in a few ways that matters:

•  A single 20% rate applies to qualified rehabilitation expenditures. The enhanced 25% tier is gone, along with the affordable housing, transit-oriented development, surplus property, census tract, and military base reuse criteria that triggered it.

•  The credit is capped at ​$5 million per taxpayer, a per-taxpayer ceiling that doesn’t appear in the current statute.

•  The qualified residence credit is eliminated. Owner-occupants rehabilitating a historic home will no longer have a state credit to apply for once the current program sunsets.

•  The statutory ​$50 million annual cap is gone too, but not in the developer’s favor. In its place, the credit amount is ​$0 unless the Legislature appropriates funding for it through the annual Budget Act or another measure. Instead of a guaranteed, if capped, allocation written into tax law, the program now has to compete for funding through the state budget process every year.

The eight-year carryforward for unused credits stays in place, and the credit continues to be claimed in the year the structure is placed in service.

What Stays the Same

The application mechanics are largely unchanged: taxpayers still request a tax credit allocation from CTCAC in conjunction with the Office of Historic Preservation, and OHP still sets the window in which rehabilitation must begin after an allocation is issued or forfeit it. The bill directs OHP and CTCAC to add “additional requirements relating to the manner in which credits are allocated,” details of which will presumably arrive through regulation. The Legislative Analyst’s collaboration with CTCAC and OHP to review the credit’s effectiveness continues, and the bill specifically requires the Legislative Analyst to report to the Legislature on the credit’s effectiveness for 2025 and 2026 before the new version takes over. Recapture, basis reduction, and the prohibition on double-dipping with a deduction all carry forward unchanged.

What This Means for Developers and Investors

Any project that includes an affordable housing component, sits in a designated census tract, or qualifies as transit-oriented development should be modeled at the flat 20% rate for expenditures incurred in 2027 or later, not the 25% rate available under the current program. That’s a real reduction in credit value for exactly the kinds of projects the enhanced tier was designed to encourage. Owner-occupants planning to use the qualified residence credit have a hard deadline: expenditures need to fall within the current program’s window, since that credit doesn’t carry into the new structure at all.

The bigger planning shift is around funding certainty. Because the post-2027 credit depends on an annual budget appropriation rather than a standing statutory cap, the size, timing, and even the existence of allocations in a given year become a budget-cycle question rather than a settled fact once a project is otherwise eligible. Developers sequencing multi-year rehabilitation projects around this credit should track the state budget calendar as closely as they track their own construction schedule, and buyers evaluating a project’s state credit component should ask where that year’s appropriation stands before assuming the credit will be there.

Where Fallbrook Fits

Fallbrook Financial Services works as a facilitator and intermediary connecting taxpayers, developers, and capital sources across the tax credit markets we serve, including historic rehabilitation, LIHTC, renewable energy, and film and entertainment credits. We help developers plan around program transitions like this one, so that a credit’s value on paper matches what a project can actually count on.

The Bottom Line

As of this writing, AB 1265 is enrolled and sitting on Governor Newsom’s desk; bills presented after the Legislature’s final adjournment typically give the Governor up to 30 days to act, which puts the deadline around the end of September. If signed, California’s historic tax credit doesn’t simply continue past 2026, it changes shape: flatter, capped per taxpayer, no longer available to owner-occupants, and funded year to year at the Legislature’s discretion instead of by statute. Developers with projects that lean on the current enhanced rate or the residence credit have a real reason to move sooner rather than later.

Statutes Amended and Added by AB 1265

Bill:

Assemb. B. 1265, 2025–2026 Leg., Reg. Sess. (Cal. 2026) (as amended Aug. 20, 2026).

Amended:

Cal. Rev. & Tax. Code § 17053.91 (West 2026).

Added (repealed by their own terms as of Jan. 1, 2032):

Cal. Rev. & Tax. Code § 17053.92 (West 2026) (personal income tax credit).

Cal. Rev. & Tax. Code § 23692 (West 2026) (corporation tax credit).

Sunsetting on its own terms, not amended by AB 1265:

Cal. Rev. & Tax. Code § 23691 (West 2026).

Sources

CalMatters Digital Democracy — AB 1265 Bill Summary and Enrolled Text: https://calmatters.digitaldemocracy.org/bills/ca_202520260ab1265

Franchise Tax Board — Bill Analysis, AB 1265 (Introduced 2/21/25, Amended 4/10/25 and 1/5/26): https://www.ftb.ca.gov/tax-pros/law/legislation/2025-2026/AB1265-022125-041025-010526.pdf

Assembly Committee on Revenue and Taxation — Bill Analysis, AB 1265 (Haney): https://arev.assembly.ca.gov/system/files/2026-01/ab-1265-haney.pdf

LegiScan — California AB1265, 2025-2026 Regular Session: https://legiscan.com/CA/bill/AB1265/2025

This article is for general informational purposes only and does not constitute tax, legal, financial, or investment advice. Fallbrook Financial Services acts solely as a facilitator and intermediary in tax credit transactions and is not a broker-dealer, investment adviser, or tax or legal advisor. AB 1265 had not been signed into law as of the date of this article and remains subject to change through the Governor’s action, subsequent budget appropriations, and implementing regulations. Readers should consult their own qualified tax, legal, and financial advisors before making any decisions related to California historic tax credit transactions.