If you’re renovating a building in a historic part of town, you may be able to claim a 20 percent federal tax credit for the cost of the renovation work. The benefit has to do with the tax credit for rehabilitating certified “historic structures.”
Credit Can be Recaptured
The rehabilitation tax credit is subject to recapture if the building on which it was claimed is sold or ceases to be business use property within five years from the date it was first placed in service. The amount of recapture is reduced by 20 percent for each full year that elapses after the property is placed in service. In other words, there is a 100 percent recapture if the property is disposed of less than one year after it is first placed in service; 80 percent after one year, 60 percent after two years; 40 percent after three years; and 20 percent after four years. (IRC Section 50(a))
Click here to read more about the 20 percent rehabilitation tax credit from the National Park Service, which works on certification with the Secretary of the Interior and Historic Preservation Offices in each State.
The historic structures tax credit is similar to the 10 percent tax credit available for rehabilitating commercial properties Essentially, you must meet the same criteria needed to claim the rehabilitation credit (for example, 75 percent of the external walls must be retained) but there are three key differences:
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.” The age of the building isn’t a factor.
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.
3. The completed building can be used for residential rental purposes, as well as commercial or industrial applications.
What expenses qualify for the tax credit? Any expenditure for a structural component of a building qualifies, including walls, partitions, floors, ceilings, permanent coverings such as paneling or tiling, windows and doors, components of central air conditioning or heating systems, plumbing and plumbing fixtures, electrical wiring and lighting fixtures, chimneys, stairs, escalators, elevators, sprinkling systems, fire escapes and other components related to the operation or maintenance of the building.
In addition to the above “hard costs”, there are “soft costs” that qualify, such as construction period interest and taxes, architect fees, engineering fees, construction management costs, reasonable developer fees and any other fees paid that would normally be charged to a capital account.
However, a number of expenses do not qualify for the credit, such as appliances, cabinets, landscaping and outdoor lighting remote from the building.
Don’t overlook the fact that you might own a valuable piece of history. Thousands of buildings have already been certified as being historic. To begin the process, you must request certification of a historic structure from the Secretary of the Interior (NPS Form 10-168c). If you qualify, attach a copy of the final certification to an IRS form with the first tax return filed after receiving the certification. There may also be state tax incentives.
Eric Cohen, CPA is the President and Founder of E. Cohen and Company CPAs, a full-service CPA firm serving nonprofit organizations, government contractors, professional service companies and other industries with audit, tax and business advisory services for over 26 years. The firm was commended as a SmartCPA Reader’s Choice by SmartCEO magazine and a “Best Accounting Firm to Work For” by AccountingToday magazine. For more information, visit www.ecohencpas.com or call 301-917-6200.