Historic Properties Rehabilitation Tax Credits

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Arks's picture
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I just have to crow that I "made" over $400,000 yesterday!

I'm well into the rehabilitation of a 1902 building in our town's national commercial historic district (putting in vacation rental apartments), and was notified yesterday that the National Park Service has approved my project for federal and state tax credits that will pay 45% of the cost of my project!

So, I just wanted to mention this in case some don't know such credits are available (talking USA here). If you own a historic (meaning old) structure that's either on the National Register or within a national historic district, all money you spend to rehabilitate your old building may be eligible for a 20% federal tax credit. Here in Arkansas there's also a 25% tax credit available on state income taxes. In my case, these credits amount to 45% of the cost of my project being paid by the government!

And these credits can be spread over 20 years, if necessary, to use them up, meaning if your credit is big enough, you will pay NO income tax for the next 20 years! In Arkansas, the credits can even be sold. I've already heard from 2 banks in St. Louis, wanting to buy my state tax credits at 90 cents on the dollar.

I know the program inside-out since I've been working on this over 2 years now, so if anybody has any questions, I may be able to help.

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Arks's picture
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Your project wouldn't meet the "substantial rehabilitation" test and wouldn't qualify for tax credits. The program is designed for major rehabs, to save historic old buildings.

Also (for others who might read this thread), the tax credits can't be used to rehabilitate a private residence. Must be for a commercial purpose like a B&B. In other words, if you use the credits to rehab an old house to make it a B&B, that's fine. But if you then close the B&B within five years, you'd have to give back some or all of the tax credit money. After five years you can do what you want with the property.

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So, if I am reading this thread right, our home which is on the NHR, needs the porches and balcony's replaced. But it will cost only about $20,000. our home is worth more than $225,000. so does that mean since its only 20,000. we wouldn't be eligable for the credit??

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white pine's picture
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Nope. Improvements must exceed the value.  Check with your state re. state credits tho.

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Wow!  How fantastic is that!

white pine's picture
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We did this too.More should check into it.  Tax credits can be retroactive too, but it is more difficult that way.   Important to note that you have to pay for the renovations up front,  and they must meet with the historic preservation standards, but you  do get a percentage in tax credits for them.

We also received state tax match, and look forwart to paying no income tax until these are used up.  The tax is used against ALL income of partners in the LLC so we can use them against DH's outside consulting---which happens to be historic preservation work.

 

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Congrats, Arks!  I'm involved in this as a board member of our city's historic foundation.  We actually have a staff member who acts as a paid consultant (monies go to our foundation) with other re-development folks to help them with the paperwork.  Maybe there's a second job there for you?! 

Our house was not eligible for tax credits when we did our renovations...  

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Silverspoon's picture
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 That's great...and I'm sure it was not an easy application process!  We had the house put on the Register after we did all the work...and way before so much information was easily available on the internet.  As I understand it, the renovation has to affect more than 25% of the structure.  Does that sound about right to you?

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Arks's picture
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Silverspoon wrote:

...the renovation has to affect more than 25% of the structure.  Does that sound about right to you?

National Park Service website says...

The project must meet the substantial rehabilitation test in that the cost of the rehabilitation must exceed the value of the structure being rehabilitated, or if the structure has been depreciated to its fullest extent, a minimum of $5,000.

So the value of the tax credits would be to someone wanting to buy an older home in disrepair, say for $150,000, and put at least $150,001 more into it to get it ready to serve as a B&B. For someone in Arkansas, the total federal and state tax credits would mean you end up spending $232,500 on a $300,000 project, a benefit of nearly $70,000.

Basically, the more you spend on the rehab work, the more the tax credits benefit you.

In my case, I bought the old building for just $19,000, so the huge bulk of what I'm spending on the rehab (over $800,000) is eligible for 45% of it being paid for by the government in the form of tax credits. It would never make sense to spend $800,000 just to end up with 4 apartments, but when nearly half that is reimbursed by the government, it becomes an excellent deal for me, and a big benefit to my town!

Silverspoon's picture
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 Thanks for the info Ark. It has been almost 25 years since we did our renovation and we have taken 23 years of depreciation.  I'll have to keep my eye on the rules...if we live long enough we may be able to fully depreciate the house and take advantage of the Minimum $5000 requirement you mention.  Spending $5000 is a drop in the bucket with this old house, which is now on the Register and in the park.  Thanks again for mentioning this credit which had fallen off my radar.

gillumhouse's picture
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Will those have to be paid back when you sell like the depreciation we take on our taxes has to be paid back?

white pine's picture
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Fed recapture period is  five years.  After five years you don't pay it back, It is pro-rated at 20% per year.   State laws may vary.  Note, many tax credit programs are on the government chopping block, check with your state historic preservation office.

Arks's picture
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white pine wrote:

Fed recapture period is  five years.  After five years you don't pay it back, It is pro-rated at 20% per year.

Right. If you sell the property within the first five years after taking the tax credit, you have to give money back to the government, pro-rated as above. Also, during those five years they can inspect the property at any time to make sure everything still meets their guidelines.

For instance, my building has solid brick walls, covered inside with plaster. In lots of places the plaster has fallen off exposing the brick. I'd love to leave the brick exposed because it looks cool, but no, if it originally had plaster walls, your rehab job must restore the plaster look. If, after you get the credit, you remove the plaster within the first 5 years, they can make you give them their money back (if they discover it in an inspection).

After 5 years the building is fully yours again, to do with as you please.

Weaver's picture
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Arkansawyer wrote:

white pine wrote:

Fed recapture period is  five years.  After five years you don't pay it back, It is pro-rated at 20% per year.

Right. If you sell the property within the first five years after taking the tax credit, you have to give money back to the government, pro-rated as above. Also, during those five years they can inspect the property at any time to make sure everything still meets their guidelines.

For instance, my building has solid brick walls, covered inside with plaster. In lots of places the plaster has fallen off exposing the brick. I'd love to leave the brick exposed because it looks cool, but no, if it originally had plaster walls, your rehab job must restore the plaster look. If, after you get the credit, you remove the plaster within the first 5 years, they can make you give them their money back (if they discover it in an inspection).

After 5 years the building is fully yours again, to do with as you please.

What if your restoration doesn't include touching the walls, but restoring the public areas, and leaving the exposed brick where the tax credits won't matter? 

Or is this an all or nothing deal?

Never done a historical preservation before.

 

white pine's picture
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Your state historic preservation office is the agency who do the initial review and pass it on to the feds.  It is their call as to what is accepted. 

Arks's picture
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Weaver wrote:

What if your restoration doesn't include touching the walls, but restoring the public areas, and leaving the exposed brick where the tax credits won't matter? 

I only know about doing a full project. White Pine...HELP! This is a good question that needs an answer.

They do allow you to do a project in phases, spread over 5 years, and start taking credits as soon as your rehab expendatures exceed the original value of the building. But I don't know what happens if you stop part way through and never finish all the phases.

Here's what the park service website says about it:

Phased rehabilitations—that is, rehabilitations expected to be completed in two or more distinct stages of development—must also meet the “substantial rehabilitation test.” However, for phased rehabilitations, the measuring period is 60 months rather than 24 months. This phase rule is available only if: (1) a set of architectural plans and specifications outlines and describes all rehabilitation phases; (2) the plans are completed before the physical rehabilitation work begins, and (3) it can reasonably be expected that all phases will be completed.

For phased projects, the tax credit may be claimed before completion of the entire project provided that the substantial rehabilitation test has been met. If a building remains in service throughout the rehabilitation, then the credit may be claimed when the substantial rehabilitation test has been met. In general, unused tax credit can be “carried back” one year and “carried forward” 20 years.

white pine's picture
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Also, if you get wiped out by a natural disaster within those five years you must pay it back.   Unlike a non-historic building, where you can rebuild, a historic structure can lose its historic integriy, even if it is rebuilt to look the same, it is no longer historic, and you pay it back.   If the building can be repaired to secretary of the interior standards without endangering its integrity, you may keep the credits.  Call made by a historic architect and state historic preservation office.

gillumhouse's picture
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white pine wrote:

Also, if you get wiped out by a natural disaster within those five years you must pay it back.   Unlike a non-historic building, where you can rebuild, a historic structure can lose its historic integriy, even if it is rebuilt to look the same, it is no longer historic, and you pay it back.   If the building can be repaired to secretary of the interior standards without endangering its integrity, you may keep the credits.  Call made by a historic architect and state historic preservation office.

It is funny what will get called "restored" and and what will be "re-comstructed". I know a muzzleloader rifle builder (not DH, a nationally recognized historic builder) who restored a rifle for a museum - all he had that was original was the patchbox cover!

Arks's picture
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gillumhouse wrote:

It is funny what will get called "restored" and and what will be "re-comstructed". I know a muzzleloader rifle builder (not DH, a nationally recognized historic builder) who restored a rifle for a museum - all he had that was original was the patchbox cover!

Yes, my grandfather had a favorite axe. Althought the handle had been replaced 3 times and and the head once, it was still his favorite.

Hadn't thought about fire or tornado or earthquake taking the building and them taking the tax credits back. I guess if you're fully insured, you'd pay the credits back out of the insurance check, and you'd end up with the amount you spent on it in the first place...except it never works out to cover all you lost in the disaster.

Arks's picture
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I got lucky in that it was the news that we got a historic district that spurred me to start the project, so I was able to do it with credits in mind from the beginning.

I also hear of cases of people who ARE in a historic district who do the remodel first, then ask for the tax credits, and that usually doesn't work out because there are certain dos and don'ts that have to be followed to get the credits. That's why I wanted to  mention it here, because so many people don't even realize the credits are available, and I know lots of B&Bs are in historic old houses that might qualify if they get on the National Register or are in a historic district.

gillumhouse's picture
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Unfortunately I did all of mine before we were designated an Historic District.

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I saw your blog on this and did a few standing ovations for you! 

We too have tax credits available to the next buyer here. Not your $400k, but $40k.

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Arks's picture
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Joey Bloggs wrote:

Not your $400k, but $40k.

$40k is significant! That's great!

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