Rundown on tax break for renovations
A real estate owner may be contemplating the renovation of an older building in a historic part of town or a place that otherwise has historical implications. Fortunately, the federal tax law provides some incentives. Before you start tearing down walls and putting up a new façade, follow the steps for having the building certified as a historic structure. The payoff is a tax credit—a dollar-for-dollar reduction of your tax bill—equal to 20% of the renovation costs.
Note that the tax credit for restoring historic structures is twice the usual 10% tax credit available for rehabilitating older buildings. For example, if the renovation costs, say, $500,000, you can effectively reduce the expenditures by $100,000. This is true even though the requirements generally aren’t as stringent as they are for the “rehab credit.”
Background: The 10% rehab credit can be claimed for renovating a building placed in service before 1936. To qualify, 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). Furthermore, the rehabilitation work must meet certain specific wall-retention requirements. Finally, the building must have been placed in service by the taxpayer before the rehabilitation work began.
For this purpose, qualified 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 point: Unlike the rehab credit, you do not have to stick to strict wall-retention rules to qualify for the historic credit. However, you must meet the following 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 work must also be certified. This means the finished product must retain the original historic character (but not necessarily the original use) of the building.
Also, the owner of a historic building must own it for at least five years after completion of the rehabilitation work or he or she will have to pay back all or part of the 20% credit. Remember this special recapture provision before you begin the work.
In summary: More properties will qualify for the historic credit than you might think. It is not necessary for George Washington to have slept there nor does the place have to be an antebellum mansion. The list of historic structures is far more inclusive than that.
Currently, the National Register of Historic Places names more than 80,000 locations that are eligible for the credit. You can visit its Web site to obtain more information, including an application for certification, at www.nps.gov/nr/about.htm. If you need more assistance, rely on your professional tax advisers for guidance.