Tax Credits and Incentives for Historical Properties

Tax Credits and Incentives for Historical Properties: A Guide for Homeowners Rebuilding or Repairing Their Home

Rebuilding or repairing a historical property after a disaster can be a challenging and costly endeavor. However, there are numerous tax credits and incentives available to homeowners who undertake the restoration of historic properties. These incentives are designed to preserve the architectural and cultural heritage of historic buildings while providing financial relief to property owners.

This detailed article will explore the tax credits and incentives available for historical properties, offer practical advice on how to take advantage of these programs, and include specific examples and relevant web links for further reading.

Understanding Historical Property Tax Credits and Incentives

Historical property tax credits and incentives are financial benefits provided by federal, state, and local governments to encourage the preservation and restoration of historic buildings. These incentives can significantly reduce the cost of repairs and renovations, making it more feasible to maintain the historical integrity of a property.

Federal Historic Preservation Tax Incentives

The primary federal tax incentive for historic preservation is the Federal Historic Preservation Tax Credit (HTC). This credit is available for the rehabilitation of certified historic buildings and can be a powerful tool for homeowners looking to restore their properties.

1. Federal Historic Preservation Tax Credit (HTC)

Overview

The Federal Historic Preservation Tax Credit offers a credit equal to 20% of the qualified rehabilitation expenses incurred in the restoration of a certified historic structure. This credit is available to both homeowners and commercial property owners, although the rules differ slightly depending on the type of property.

Eligibility

Certified Historic Structure: To qualify, the property must be listed on the National Register of Historic Places or be located in a certified historic district and contribute to the district's historic significance.
Substantial Rehabilitation: The rehabilitation work must be substantial, meaning the cost of the rehabilitation must exceed the greater of $5,000 or the Adjusted Basis of the building (the purchase price minus the cost of land, plus improvements and minus Depreciation).
Qualified Rehabilitation Expenses: Eligible expenses include costs related to the repair and renovation of the historic structure, such as architectural and engineering fees, construction costs, and certain soft costs. Landscaping, new additions, and furnishings are typically not eligible.

How to Claim

Part 1: Obtain Certification: Before claiming the credit, the property must be certified as historic by the National Park Service (NPS). This involves submitting an application that includes detailed descriptions and photographs of the property.
Part 2: Complete the Rehabilitation: The rehabilitation work must be consistent with the Secretary of the Interior's Standards for Rehabilitation, which ensure that the historic character of the building is preserved.
Part 3: Claim the Credit: After the work is completed and certified by the NPS, the tax credit can be claimed on IRS Form 3468 when filing your federal income tax return.

Example

Scenario: A homeowner purchases a historic home listed on the National Register of Historic Places for $300,000. They spend $200,000 on qualified rehabilitation expenses to restore the property.
Tax Impact: The homeowner qualifies for a tax credit of 20% of the rehabilitation expenses, or $40,000, which can be applied to their federal income tax liability.

State Historic Preservation Tax Credits

Many states offer additional tax credits and incentives for the preservation of historic properties. These state-level programs often complement the federal HTC and can provide substantial additional financial benefits.

1. Virginia Historic Rehabilitation Tax Credit

Overview

Virginia offers a state tax credit for the rehabilitation of certified historic structures, which provides a credit equal to 25% of the eligible rehabilitation expenses. This credit can be used in conjunction with the federal HTC, providing a powerful incentive for property owners.

Eligibility

Certified Historic Structure: The property must be a certified historic structure, as defined by the Virginia Department of Historic Resources.
Qualified Rehabilitation Expenses: Similar to the federal HTC, eligible expenses include costs directly related to the rehabilitation of the historic structure. The project must also meet the Secretary of the Interior’s Standards for Rehabilitation.

How to Claim

Apply for Certification: The property must be certified as historic, and the rehabilitation work must be approved by the Virginia Department of Historic Resources.
Complete the Rehabilitation: The rehabilitation work must be substantial, similar to the federal requirements.
Claim the Credit: After completing the rehabilitation, the tax credit can be claimed on the Virginia state tax return. The credit can be carried forward for up to ten years if not fully used in the year the rehabilitation is completed.

Example

Scenario: A homeowner in Virginia spends $150,000 on qualified rehabilitation expenses for a historic home. In addition to the federal HTC, they qualify for a state tax credit of $37,500 (25% of $150,000).
Tax Impact: The homeowner can apply this $37,500 credit to their Virginia state income tax liability, in addition to the federal credit of $30,000, significantly reducing the cost of the rehabilitation project.

2. New York State Historic Homeownership Rehabilitation Tax Credit

Overview

New York offers a state tax credit specifically for homeowners who rehabilitate historic homes. The credit is equal to 20% of the qualified rehabilitation costs, up to $50,000 in credits.

Eligibility

Certified Historic Structure: The property must be listed on the National Register of Historic Places or be located in a certified historic district.
Income Limitation: The homeowner’s household income must not exceed $60,000 to qualify for the credit.
Qualified Rehabilitation Expenses: Eligible expenses include costs for interior and exterior work that contributes to the preservation of the historic structure.

How to Claim

Obtain Certification: The property must be certified as historic, and the rehabilitation plan must be approved by the New York State Historic Preservation Office.
Complete the Rehabilitation: After the rehabilitation work is completed, the homeowner can claim the credit on their New York state tax return.
Combine with Federal Credit: This state credit can be used in conjunction with the federal HTC, maximizing the financial benefits.

Example

Scenario: A homeowner in New York spends $100,000 on qualified rehabilitation expenses. They qualify for a state tax credit of $20,000 (20% of $100,000) and also qualify for the federal HTC.
Tax Impact: The homeowner can apply the $20,000 state tax credit to their New York state tax liability, and also apply the federal credit of $20,000, effectively reducing the cost of their rehabilitation by $40,000.

3. Additional State Historic Tax Credits

Massachusetts Historic Rehabilitation Tax Credit: Provides a state tax credit of up to 20% of the cost of rehabilitating historic properties. This credit can be used in conjunction with the federal HTC and is capped at $5 million per project.
Missouri Historic Preservation Tax Credit: Offers a state tax credit of up to 25% of eligible rehabilitation costs. This credit can also be combined with the federal HTC and is one of the most generous state programs in the country.
North Carolina Historic Preservation Tax Credits: North Carolina offers a 15% or 25% state tax credit for the rehabilitation of historic homes, depending on the location and the type of project.

Local Historic Preservation Incentives

In addition to federal and state incentives, many local governments offer tax abatements, grants, and other incentives to encourage the preservation of historic properties.

1. Property Tax Abatements

Overview

Some local governments offer property tax abatements for historic properties undergoing rehabilitation. These abatements can freeze the property’s Assessed Value at pre-rehabilitation levels, preventing an increase in property taxes due to the improvements.

Example

Scenario: A homeowner in San Francisco, California, undertakes a significant rehabilitation of a historic home. The city offers a property tax abatement program that freezes the property’s assessed value for ten years, preventing an increase in property taxes during the abatement period.
Tax Impact: The homeowner can complete the rehabilitation without facing higher property taxes, providing significant financial relief.

2. Local Grants for Historic Preservation

Overview

Many cities and counties offer grants to homeowners who are rehabilitating historic properties. These grants can help cover the cost of specific improvements, such as restoring historic facades, windows, or roofs.

Example

Scenario: A homeowner in Charleston, South Carolina, applies for a local grant to restore the historic windows on their home. The city offers a matching grant that covers 50% of the restoration costs, up to $10,000.
Tax Impact: The homeowner receives $10,000 in grant funds, reducing the out-of-pocket cost of the restoration by half.

Advice for Homeowners

Research Eligibility Requirements
- Understand the Rules: Each federal, state, and local program has specific eligibility requirements, such as certification as a historic structure, substantial rehabilitation requirements, and qualifying expenses. Ensure your project meets these requirements before starting the work.
Consult with Preservation Specialists
- Seek Expert Guidance: Historic preservation projects often require adherence to specific standards. Consulting with a preservation architect or specialist can help ensure that your project qualifies for tax credits and that the historic character of your property is preserved.
Combine Multiple Incentives
- Maximize Benefits: Many historic preservation projects qualify for multiple incentives, including federal, state, and local credits, grants, and abatements. Combine these programs to maximize your financial benefits and reduce the overall cost of your project.
Keep Detailed Records
- Document Everything: Maintain thorough records of all rehabilitation expenses, including receipts, invoices, and any approvals or certifications from historic preservation authorities. These records are essential for claiming tax credits and may be required for audits or reviews.
Start the Certification Process Early
- Plan Ahead: The process of obtaining historic certification and approval for your rehabilitation plan can be time-consuming. Start this process early to avoid delays in your project and ensure you meet all necessary deadlines.

Wrap-Up

Tax credits and incentives for historical properties can provide significant financial relief for homeowners rebuilding or repairing their homes, particularly when preserving the historical integrity of the property. By understanding the available federal, state, and local programs and how to claim these benefits, you can reduce the cost of your rehabilitation project and help preserve a piece of history.

For more information on tax credits and incentives for historical properties, consider visiting the following resources:

National Park Service - Historic Preservation Tax Incentives: NPS Tax Incentives
IRS Form 3468: Investment Credit: IRS Form 3468
Virginia Department of Historic Resources - Rehabilitation Tax Credit: Virginia Historic Tax Credit
New York State Office of Parks, Recreation and Historic Preservation - Homeowner Rehabilitation Credit: NY Historic Homeownership Credit
Mills Act Historical Property Contracts: CA Mills Act Program

These resources can help you better understand and apply for tax credits and incentives, ensuring you maximize your savings and successfully preserve your historic property.

Historical Homes