Historic buildings make a beautiful location for doing business. Unfortunately, many of them may seem out of the price range of small business owners. But, that’s not necessarily the case. The state and federal governments have an interest in preserving these properties, and they are willing to give you tax credits for buying and restoring a historic building. The credits reimburse a large proportion of your restoration costs.
This really is a great incentive to go for a building that will give your company a unique and professional feel. You see, unlike deductions, tax credits reduce your taxes dollar-for-dollar. For example, when you spend $20,000 and get a 50 percent tax credit, you save $10,000 on your tax bill. It’s that simple. It depends which state you live in, but tax credits could save you up to 70 percent on the restoration costs, making a historic building a much more reasonable option.
Federal and State Credits
You have two separate tax credit options available to you from the federal government. The first is a 20 percent credit for rehabilitating an income-producing building that has been deemed a certified historic structure by the Secretary of Interior, through the National Park Service. The other is for rehabilitating non-historic buildings that were put into service prior to 1936, and the credit is for 10 percent of the rehab cost.
You can also get an additional credit from most states, and it’s perfectly legal to take advantage of both the state and federal credits. Tax credits at the state level can be anywhere from 0 to 50 percent. You can check the laws for your state at the National Trust for Historic Preservation . If you’re fortunate enough to live in a state that provides a 50 percent credit, you’ll get up to 70 percent off the rehab costs when combined with the federal credit.
A few other credits also exist that may help you with the purchase of a building. Here a few you might consider:
- If you’re buying in a low-income area, you could qualify for the new markets tax credit for loans and investments in such locales.
- The low-income housing tax credit is available for real estate investments in affordable housing.
- Another option is available that is not a credit but is still a good option to keep in mind regarding your business property. You can donate your historic building to a qualified 501(c)(3) organization.
Making Sure You Qualify
In order to get the tax credits for your historic building, you must use it for the purpose of producing income. Some qualifying examples include:
- Single-family rentals
- Industrial buildings
- Commercial buildings
- Agricultural buildings
Although some forms of residential real estate are included in the list, you may not claim the historic tax credit for your personal home. However, if you own a property that you use for both your home and an office space or rental unit, it’s possible for you to qualify on just the part of the building you don’t use for your residence.
Important tip: If you don’t plan on keeping the property for more than five years, you will have to repay some of the federal tax credit at the time of sale. This is because the federal government has a five year recapture period for this purpose. On the other hand, if you do keep the property for more than five years, you don’t pay any recapture and benefit from 100 percent of the building’s increased value.
You’ll also need to check the recapture rules for your state, which are separate from the federal recapture period.
Now know just how substantial the available historic tax credits are, but you’ll also need some advice on how to get the whole process started:
- Use the National Park Service website to search for historic places.
- Find contact information for the historic preservation office in your state. They’ll be able to help you with state-specific information throughout the process.
- Look for an architect with experience in historic preservation. This is not only important to maintaining your building, but also to your taxes. That’s because the Secretary of Interior has to certify your historic restoration as authentic. Here are some of the regulations:
- Justification for window removal
- Justification for alterations to the storefront
- Ensuring that replacement sash matches with the original size, color, trim details, pane configuration, and reflective qualities (you can see that the requirements are pretty specific)
- Make sure you know the specifics for the tax credits available to you in your area. Before you make a purchase, you should consult your tax advisor and the state preservation office.
- This should go without saying, but just so we’re clear, be certain that you will make a profit. Calculate the numbers with the after-tax adjusted rate-of-return formula. This is also called the managed internal rate of return (MIRR).
What Do the Credits Cover?
Basically, any costs that are part of renovation, restoration, rehab, or reconstruction of a historic building qualify for tax credits, and a variety of business structures are eligible, including S corporations, partnerships, personal service corporations, closely held corporations, and individuals. The lessee of a historic building also qualifies for credits on the expenses for renovating or rehabilitating a qualifying building. Expenses that do not qualify include:
- Costs for acquiring the building
- The price of the land or other features like sidewalks, landscaping, or parking lots
- New construction
- Personal property
- Expanding the volume of the building
There is a caveat that could prevent you from gaining the full benefit of these tax credits if you’re a high income earner—the AMT (alternative minimum tax). The AMT is calculated separately from your regular taxes and works to eliminate some of the deductions you would normally be entitled to. At tax return time, you’ll pay either the AMT or regular taxes, whichever is higher.
Because the highest earners often have the most deductions, the AMT was created as a way to cap that lost tax revenue. You can’t use the historic renovation credit if you’re paying the AMT in a particular year, but you may carry the denied credits back one year and forward 20 years. Just keep track of your credits and rehab expenses, and don’t forget to claim the benefit in a year when you don’t pay the AMT.
It’s important to make sure you check all the details with your tax advisor and document your strategy. If you’re going to go to the work and expense of renovating a historic building for your business, you want to make sure you get the tax advantage you’re expecting. Otherwise, you can find your business with a heavy and unexpected financial burden. With the right plan in place, a renovated building can establish your business as being committed to the local community, its culture, and its history.
- IRC Section 47. ↑
- IRC Section 45B. ↑
- IRC Section 42. ↑
- IRC Section 50(a). ↑
- IRC Section 47(c)(2)(C). ↑
- Federal Taxes Affecting Real Estate (6th Edition), Thom V. Glynn, Esq., Release No. 33, May 2005, Section 5.03[b]. ↑
- Reg. Section 1.48-12(c)(9). ↑
- Reg. Section 1.48-12(c)(5). ↑
- Reg. Section 1.48-12(b)(2)(iv). ↑
- IRC Section 47(c)(2). ↑
- Reg. Section 1.48-12(c)(10). ↑
- Tax Aspects of Historic Preservation, Mark Primoli, IRS, October 2000, p. 11. ↑