20% Federal Tax Credit
The 20% rehabilitation tax credit equals 20% of the amount spent in a certified rehabilitation of a certified historic structure. Under ideal circumstances, if an owner spent $100,000 restoring a historic building he would get $20,000 worth of tax credit. Unused tax credit can be applied to the previous year’s tax bill and carried forward up to twenty years. 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.
How does a Building Become a Certified Historic Structure?
To be designated a certified historic structure, a building must be either listed individually in the National Register of Historic Places or be certified as a contributing property in a National Register-listed historic district. To request certification by the National Park Service, 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 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.
What is a Certified Rehabilitation?
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.
Requirements for Eligibility
The building must be depreciable. 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). 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. 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. This means, generally, that 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.
To qualify for the tax incentives, property owners must complete the appropriate part or parts of the Historic Preservation Certification Application.
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 pre-approval for your project. If work must begin before that time, make sure to submit your application as early in the process as possible.
Provide good photographs that clearly document interior and exterior conditions before and after the rehabilitation (35 mm photographs are recommended). Include views of each exterior elevation and all major interior spaces, typical minor spaces, and significant details such as porches, mantelpieces, staircases, etc.
The National Park Service has an excellent web site devoted to this tax credit. Read and follow the Secretary of the Interior’s Standards for Rehabilitation and the Guidelines for Rehabilitating Historic Buildings.
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 Colleen Gallagher, national coordinator for the historic preservation tax incentives program, at Colleen.K.Gallagher@irs.gov or 651-726-1480.
For more information contact Todd Sanders by email or call 601-576-6950.