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Restoring property? Create tax history; cut cost by 20 percent

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in Small Business Tax

Are you planning to renovate an older building in an historic part of town? Before you start tearing down the walls, cash in on a unique tax break from Uncle Sam.

Strategy: Have the building certified as an historic structure. That may take a little time and energy on your part, but the payoff is usually worth it.

 

Assuming the building qualifies, you can claim a tax credit—a dollar-for-dollar reduction of your tax bill—worth 20 percent of your renovation costs.

That's not a misprint. The tax credit for restoring historic structures is double the usual 10 percent tax credit for rehabilitating older buildings. And the requirements aren't as stringent.

In effect, the federal government is discounting one-fifth of the cost of the work. On a renovation costing $500,000, you can slice $100,000 off the bill.

How to earn "rehab" credit. You can claim a 10 percent "rehab" tax credit for renovating a building that was placed in service before 1936. The work must be substantial (i.e., expenses over a two-year period must exceed the greater of $5,000 or the adjusted basis of the building and its structural components). Also, the rehabilitation work must meet specific wall-retention requirements.

Qualified rehabilitation expenses include architectural and engineering fees, site survey and development fees, legal expenses, and other construction-related costs, as long as they are added to the property's basis and are reasonable in amount.

Earning historic structure credit. Unlike the rehab credit, you don't have to bend over backward to qualify for the historic structures credit. For instance, no age or wall-retention restrictions exist. But you must meet two additional requirements:

1. The building must be listed on the National Register of Historic Places or located in a registered historic district and certified by the Secretary of the Interior as being historically significant.

2. The rehabilitation must also be certified. That means the finished product must retain the original historic character (but not necessarily the original use) of the building.

More buildings will qualify for this tax break than you might think. It isn't necessary for George Washington to have slept there. The list is far more inclusive than that.

The National Register of Historic Places alone lists almost 79,000 locations eligible for the credit and keeps adding more every week. Visit its Web site at www.cr.nps.gov/nr. You can obtain an application for certification at www.cr.nps.gov/hps/tps/tax /hpcappl.htm#appl.

Final tip: No quick-sell jobs. Owners of historic buildings must hold them for at least five years after completion of the rehabilitation work or they'll have to pay back all or part of the 20 percent credit. Be mindful of this special recapture provision when you begin the work.

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