Are you planning to renovate an older building in a historic area? Before you start tearing down walls and destroying the fabric of the property, check to see if you’ll qualify for a unique tax break.
Strategy: Have the building certified as a historic structure. It may take some time and energy, but the payoff is usually well worth it. Assuming the tax law requirements are met, 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 covering one-fifth of the cost of the work with the 20% credit. On a renovation costing $500,000, you’ll slice $100,000 right off the top of the bill.
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 backwards to qualify for the historic structures credit. For instance, there are no age or wall retention restrictions. However, 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. This 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 currently lists more than 90,000 locations that are eligible for the credit. Visit their website at www.cr.nps.gov/nr/about.htm.
Tip: The owner of a historic building must hold it for at least five years after completion of the rehab work or pay back all or part of the 20% credit. Remember this special recapture provision when you begin the work.