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Making History: A Tax Credit for Renovating Real Estate

Are you in the process of renovating a building that has seen better times? If the building is located in a historic part of town, you may be able to double up on a conventional tax benefit. Reason: The credit for restoring certified historic structures is 20% instead of the usual 10% credit for rehabilitation work. And it's easier to qualify for the 20% credit than you might think.

Background: The rules for claiming the historic credit are not as stringent as the rules for the regular rehabilitation credit. For instance, you do not have to meet specific requirements concerning the age of the building and retention of walls.

However, to qualify for the historic structures credit, you must meet the following requirements:

1. The building must be listed on the National Register of Historic Places structures or located in a registered historic district and certified by the United States Department of the Interior as being historically significant.
   
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 (but it still must be depreciable).

As with the regular rehabilitation credit, the work must be substantial in nature (i.e., generally defined as expenses over a two-year period exceeding the greater of $5,000 or the adjusted basis of the building and its structural components). Qualified rehabilitation expenses may 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 basis of the property, are reasonable in amount and are related to services performed. The owner of the rehabilitated building must hold it for at least five years after completion of the rehabilitation or pay back all or part of the 20% credit.

Can you take advantage of this tax break? There are literally thousands of buildings throughout the country that have already been certified as being historic. Others will qualify if the paperwork is submitted. Check with the National Register of Historic Places for more information.

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