Historic Rehabilitation Tax Credits: How They Work
Federal Tax Credits
If you’re applying for historic rehab tax credits you must avoid altering features that characterize a property.
Current Federal tax incentives for preservation allow for a 20% tax credit for the certified rehabilitation of historic structures and a 10% tax credit for the rehabilitation of non-historic, non-residential buildings built before 1936. To be eligible for the program, your building must be listed individually in the National Register of Historic Places -OR- it must be located in a registered historic district and certified by the National Park Service as contributing to the historic significance of that district. (A registered historic district is any district listed in the National Register of Historic Places. A State or local historic district may also qualify as a registered historic district if the district and the enabling statute are certified by the Secretary of the Interior.) Your state historic preservation office can help you determine if your property is in a historic district or on the national register. A tax credit differs from an income tax deduction. An income tax deduction lowers the amount of income subject to taxation. A tax credit, however, lowers the amount of tax owed. In general, a dollar of tax credit reduces the amount of income tax owed by one dollar.
- The 20% rehabilitation tax credit equals 20% of the amount spent in a certified rehabilitation of a certified historic structure.
- The 10% rehabilitation tax credit equals 10% of the amount spent to rehabilitate a non-historic building built before 1936.
One hitch with the Federal tax credit program is that the 20% credit is not available for owner-occupied properties. It is for income-producing properties rehabilitated for commercial, industrial, agricultural, or rental residential purposes.
The tax credit application is detailed and documentation extensive; so it can be well worth it to hire a professional historic rehab tax credit consultant. Typically, the consultant will prepare both federal and state applications, if you are eligible for them. The consultant can guide you during your renovation so that you don’t make changes that will be rejected and cost you the tax credits. The National Park Service, which administers the tax credit program, assumes that some alteration of the historic building will be necessary to provide for an efficient, contemporary use. However, the project must not damage, destroy, or cover materials or features, whether interior or exterior, that help define the building’s historic character.
Read more about the Federal historic rehab tax credit program by visiting http://www.nps.gov/history/hps/tps/tax/brochure1.htm. Check the Old House Authority Preservation Experts http://www.oldhouseauthority.com/experts/ network for a list of tax credit consultants.
State Tax Credits
States vary widely in the amount of rehab tax credits offered, so you’ll have to check with your State Historic Preservation Office for details about how the program works in your area. Unlike the Federal program, the state programs apply to owner-occupied properties. Find out how it works by first, locating your state preservation office at http://www.ncshpo.org/stateinfolist/ , and then going to their website.
Local Real Estate Tax Abatements
Many localities offer a temporary elimination of increased real property taxes-called tax abatements-to taxpayers who improve their property regardless of whether the property is historic or not. They believe that renovation stimulates economic development. In Cleveland-like many cities-the program is administered through the City’s Department of Community Development. A Housing Officer is appointed to verify investments and to notify the County Auditor’s Office of approved cases. Cleveland’s tax abatement program applies to the rehab of existing one- and two-family homes that increase the market value as well as the rehab of multifamily (three or more units) structures, including historic buildings. In Richmond, VA, the tax abatement runs for years and transfers with the property-a tempting benefit if you decide to sell before the abatement expires. But don’t assume you can take advantage of tax abatements without applying for them BEFORE you start renovating. As with the Federal and State Historic tax credit programs, local government officials want to know the condition of your property before improvements and what your plans are. If you think your property is historic or in a historic district and that you may qualify for Historic Rehab Tax Credits:
- Study the Federal Historic Rehab Tax Credit program on the National Park Service website
- Investigate the program in your state
- Consider hiring an expert historic tax credit consultant
Whether you’re in a historic district or not, check into any real estate tax abatement programs offered by your local government. A final piece of advice: do not pick up a hammer or remove a wall until you’ve studied these programs and your eligibility. Documentation of existing conditions is critical. Gut a room prematurely, and you could cut yourself out of significant savings.
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