Are you planning to renovate an older building in a historic area? Before you start tearing down the walls, cash in on a unique tax break from your Uncle Sam.
Strategy: Have the building certified as a historic structure. It may take some time and energy, but the payoff is usually worth it. If the building qualifies, you can claim a tax credit equal to 20% of your renovation costs.
Note that the tax credit for restoring historic structures is double the usual 10% tax credit for rehabilitating older buildings—even though the requirements aren’t as stringent. In effect, the federal government is discounting one-fifth of the cost of the work.
Here’s the whole story: You can claim a 10% “rehab” tax credit for renovating a building placed in service before 1936. The work must be substantial in nature (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). In addition, the rehabilitation work must meet specific wall-retention requirements.
Finally, the building must have been placed in service by the taxpayer before the rehabilitation work has begun.
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, reasonable in amount and related to services performed.
Key tax differences: Unlike the rehab credit, you don’t have to bend over backward to qualify for the historic structures credit.
For instance, there are no age or wall-retention restrictions. However, you must meet two additional requirements:
- 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.
- The rehabilitation must also be certified. This means the finished product must retain the original historic character (but not necessarily the original use) of the building.
Tip: The National Register of Historic Places currently lists over 80,000 locations that are eligible for the credit.