Federal Preservation Tax Credit
The federal preservation tax credit equals 20% of the amount spent in a certified rehabilitation of a certified historic structure. For example, if the property owner spends $100,000 rehabilitating a historic building, he would get $20,000 worth of tax credit. The credit is taken over a five year period following the completion of the project. Long-term lessees may also apply for the credit if their lease is at 27.5 years for residential property or 39 years for nonresidential property. In order to qualify for the credit, the building must be a certified historic structure and the rehabilitation must be certified.
Requirements for Eligibility
- The building must become a certified historic structure
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To be designated a certified historic structure, a building must be either listed individually in the National Register of Historic Places, listed as a contributing property in a National Register historic district or eligible for listing either individually or as a contributing element in a National Register historic district. If the building is not listed at the time of the application, the National Register nomination process can proceed concurrently with the tax credit application process. To request certification by the National Park Service (NPS), submit Part 1 of the Historic Preservation Certification Application, Evaluation of Significance, to MDAH.
To determine if their property is listed on the National Register, owners may view the collected National Register listings for the state or contact the Historic Preservation Division by email or by phone at 601-576-6940. Owners of historic buildings not listed either individually or as part of a historic district may use the Historic Preservation Certification Application, Part 1 to request a preliminary determination of significance. If NPS determines the property meets National Register criteria, the owner may proceed with the rehabilitation project while the nomination process is underway.
- The project must be a certified rehabilitation
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A certified rehabilitation is a rehabilitation of a certified historic structure that is approved by NPS as meeting the Secretary of the Interior’s Standards for Rehabilitation. The Standards are commonsense principles in non-technical language about maintaining, repairing and replacing historic materials, as well as designing new additions or making alterations. Part 2, Description of Rehabilitation, of the tax credit application must be approved by NPS. Applicants are advised to obtain Part 2 approval prior to beginning work.
- The building must be income producing
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It must be used in a trade or business or held for the production of income (offices; commercial, industrial, or agricultural enterprises; or rental housing). It may not serve exclusively as the owner’s private residence.
- The property must be placed in service (i.e. returned to use)
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Furthermore, the owner must hold the building for five full years after completing the rehabilitation, or pay back the credit. If the owner disposes of the building within a year after it is placed in service, 100% of the credit is recaptured. For properties held between one and five years, the tax credit recapture amount is reduced by 20% per year.
- The rehabilitation must be substantial
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During a 24-month period selected by the taxpayer, rehabilitation expenditures must exceed the greater of $5,000 or the adjusted basis of the building. The adjusted basis is generally the purchase price, minus the cost of land, plus improvements already made, minus depreciation already taken. If the rehabilitation is completed in phases, the same rules apply, except that a 60-month measuring period is used. This phase rule applies only if there is a set of architectural plans and specifications for all phases of the rehabilitation, and it can reasonably be expected that all phases will be completed.
- The building must be a certified historic structure when it is placed in service
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This means that the building must be listed in the National Register either individually or as a contributing element in a National Register historic district. For buildings not individually listed in the National Register, Part 1 of the Historic Preservation Certification Application must have been filed before the building was placed in service.
Application Process
To qualify for the tax incentives, property owners must complete the Historic Preservation Certification Application.
Qualified Rehabilitation Expenses
Qualified rehabilitation expenditures include costs associated with the work undertaken on a structural component of a historic building—such as walls, roofs, windows, floors—as well as central air conditioning and heating systems, plumbing and plumbing fixtures, electrical wiring and lighting fixtures, elevators, and other components related to the operation or maintenance of the building. Other costs that qualify are architectural and engineering fees, site survey fees, legal expenses, development fees, and other construction-related costs. The credits do not apply to such costs as acquiring or furnishing the building, new additions, new building construction, or parking lots, sidewalks, landscaping, or other facilities related to the building.
Tips for Having Your Project Approved
- If possible, do not begin work until receiving Part 2 approval for the project. If work must begin before that time, make sure to submit your application as early in the process as possible.
- Provide photographs that clearly document interior and exterior conditions before the rehabilitation project begins. Include views of each exterior elevation and all major interior spaces, typical minor spaces, and significant details such as porches, mantelpieces, staircases, etc. Photos must be labeled, printed on photo paper and a photo key indicating where each photo was taken must be provided.
- Describe the project clearly and completely. Provide plans that illustrate the existing conditions and configuration of the building before the project and the proposed alterations.
- The National Park Service has an excellent web site devoted to this tax credit. Read and follow the Secretary of the Interior’s Standards and Guidelines for Rehabilitation.
Other Tax Provisions Affecting Use of Preservation Tax Incentives
Due to IRS provisions regarding real estate investments, some taxpayers may not be able to use all of the tax credits earned in a certified rehabilitation project. MDAH recommends consulting a tax professional or the IRS directly to determine the particulars of your situation.
The Internal Revenue Service coordinates the tax aspect of this program. Specific tax questions should be directed to Wandalee McLaughlin, national coordinator for the historic preservation tax incentives program, at wandalee.e.mclaughlin@irs.gov or 845-440-2424.
For more information contact Katherine Anderson by email or call 601-576-6912.