If you're rehabilitating a historic home, know that there are tax credits you may be able to claim. The federal Historic Tax Credit program also encourages preservation and rehabilitation of significant buildings in a program that's administered by the National Park Service and the IRS.
The property needs to be a substantial rehabilitation. The IRS says:
During a 24-month period selected by you, rehabilitation expenditures must exceed either $5,000 or the adjusted basis of the building and its structural components — whichever is greater.
The basis of the land is not taken into consideration.
Any expenditure you incurred before the start of the 24-month period increases the original adjusted basis.
If you complete the rehabilitation in phases, the same rules apply, except that instead of a 24-month period, a 60-month period applies, and you must meet three conditions:
There is a written set of architectural plans and specifications for all phases of rehabilitation. Written plans and specs that outline and describe the rehab phases will be accepted.
Written plans must be completed before the physical work on rehabilitation begins and all phases of rehab must appear like they'll be able to be completed.
The property must be placed in service. You'll get the rehab credit in the same year the house is ready for occupancy and has met the qualified rehabilitated building requirements.
If it's been 30 months since you've filed a tax return that claimed the credit and you still haven't finished the work, you must submit a written statement to the district director requesting an extension.
When comparing your qualified rehab expenses to the tax basis of the property, the expenses accrued over the 24-month period must end with or within the tax year the credit is being claimed. This does not apply if the building is never taken out of service but is still occupied during rehabilitation.
Know the Calculations
If you're wondering how adjusted basis is computed, it's the cost of the property — excluding land — plus or minus adjustments to the basis. Your county assessor's office can provide a building-to-land-value ratio. For the substantial rehabilitation test, the date to determine the building's adjusted basis is the first day of the 24-month measuring period or the first day of your holding period for the building — whichever is later. Generally, the holding period is deemed to begin the day after acquisition.
The basis of rehabilitated buildings — including certified historic structures — must be reduced by 100% of the rehabilitation credit earned no matter whether the credit is used or carried forward. The reduction amount is added back if the credit is recaptured.
The rehab credit is available only if you use the straight-line method of depreciation. The current recovery period is 27.5 years for residential rental property and 39 years for nonresidential real property.
Rehabilitation credits are subject to recapture if the building is sold or ceases to be business-use property. No recapture is required after five years. Recapture is reduced by 20% each year after the property is placed in service.
Your investment in restoring a building with an architectural heritage may bring new residential and commercial activity to your community. That's why the Historic Tax Credit program exists and is there to help rehabilitators like you.
Of course, this is just a summary of a complex series of rules, which may be modified at any time, so be sure to work with qualified real estate and financial professionals to make sure you are in full compliance with the law.
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