How Renovating a Historic Building Can Put Money in Your Pocket
Ernie Neve, CPA
June 10, 2021
The federal Rehabilitation Tax Credit, or rehab credit, offers significant financial incentives for owners and leaseholders of historic buildings to renovate those structures.
What’s the big deal? Why are tax credits so exciting?
Tax credits, unlike deductions, reduce your tax bill dollar-for-dollar. If you spend $100,000 and get a 20 percent tax credit, you reduce your tax bill by $20,000. That’s Uncle Sam putting $20,000 in your pocket. And there’s more.
You likely reduce your taxes with depreciation deductions on the other $80,000 and also qualify for a rehab credit from your state (most states grant rehab tax credits).
The rehab credits give you a leg up on your property because you can have the feds and states giving you money without asking for any equity in your building.
Here are the four requirements for you to qualify for the historic rehab credit:
Certified Historical Structure
The U.S. Secretary of the Interior must accredit your building as a “certified historic structure.”
Certification requests are made through your State Historic Preservation Officer on National Park Service (NPS) Form 10-168, Historic Preservation Certification Application. The
request for certification should be made prior to physical work beginning on the building.
Your building must be depreciable and income-producing. Thus, qualifying properties include, among others:
You cannot claim the rehab credit for expenditures on tax-exempt-use property. Your project generally will be disqualified if more than 50 percent of your building is leased by a tax-exempt entity.
3. Substantial Expenditure and Required Time Period
The tax code says that you substantially rehabbed the structure only if the qualified rehab expenditures during the 24-month period selected by you, and ending with or within the taxable year, exceed the greater of
the adjusted basis of such building (and its structural components, but not the land), or
If you complete the rehab in phases, the same rules apply, except that you have 60 months to complete the rehab project. This phase rule is available only if you meet three conditions:
There is a written set of architectural plans and specifications for all phases of the rehab.
You must complete the written plans before the physical work on the rehab begins, and you must be reasonably certain that you will complete all phases of the rehab.
You must place the property in service.
4. Costs That Count
In general, only costs directly related to the repair or improvement of structural and architectural features of the historic building are eligible for the rehab credit. Therefore, you can generally claim expenditures for the following items:
Walls, floors, ceilings, windows, doors, stairs, etc.
Elevators, escalators, sprinkler systems, fire escapes
Plumbing, plumbing fixtures, electrical wiring, electrical fixtures
In addition, you can generally claim any other fees paid that would normally be charged to a capital account, such as:
Construction period interest and taxes
Architect and engineering fees
Construction management costs
Reasonable developer fees
Don’t Forget About the States
Keep in mind, we are talking about a 20 percent tax credit at the federal level. Now, we have more good news!
In addition to the federal tax credits, 39 states offer rehab tax credits ranging up to 50 percent. This means that if your building is in a state that offers a 50 percent rehab credit, the total reduction in the cost of your project could be as much as 70 percent!