Have you ever dreamed about buying an old building and fixing it up? This inevitably involves bringing the building up to modern code standards—which can cost a bundle. However, a federal rehabilitation tax credit may be available to help you defray these costs. This credit is intended to help preserve historic buildings and encourage businesses to stay in older, economically disadvantaged areas, such as inner cities.
To get this credit, your rehabilitation expenditures must exceed the greater of the adjusted basis of the building and its structural components or $5,000. (The adjusted basis is generally the purchase price, minus the cost of land, plus improvements already made, minus depreciation already taken.) This usually means you'll need to do an extensive rehabilitation project or “gut rehab,” as real estate experts call it. To spend this much money on a rehab, you’ll usually have to purchase a building that is more or less a shell and restore it—no small task.
Qualifying for the Rehabilitation Credit
There are actually two different rehabilitation tax credits:
- a credit equal to 10% of part of the cost of rehabilitating a nonhistoric building built before 1936 that will be used for nonresidential, commercial purposes, and
- a 20% credit for part of the cost of rehabilitating any certified historic structure—one listed on the National Register of Historic Places or located in a Registered Historic District and determined to be of significance to the historical district.
The two credits are mutually exclusive, and which one fits your project depends on the building—not on your preference.
You can’t use the historic building credit to fix up your own home. You can get the 20% credit for commercial, industrial, agricultural, as well as residential rental buildings, but not for property that is used exclusively as the owner’s private residence. In addition, the Secretary of the Interior must certify that the project meets their standards and is a “Certified Rehabilitation.” You get this by filing a three-part application with the National Park Service. If your building is not already registered as historic, but you think it should be, you can nominate it for historic status by contacting your state historical preservation officer.
No historic certification is needed to obtain the 10% credit. However, the building must be depreciable. That is, it must be used in a trade or business or held for the production of income. It may be used for offices, for commercial, industrial, or agricultural enterprises, or for rental housing. It may not serve exclusively as the owner’s private residence. Hotels qualify because they are considered to be in commercial use, not residential.
Collecting the Rehabilitation Credit
This credit won’t help house flippers, who want to get in and out of property ownership fast. First of all, you can’t use the credit until the year the building is placed into service—that is, returned to use. What’s more, to keep the full credit, you must hold the building for five full years after completing the rehabilitation. If you dispose of the building within a year after it’s placed in service, you must pay back 100% of the credit. For properties held between one and five years, the amount you must pay back is reduced by 20% per year.
Resources on the Rehabilitation Tax Credit
The following websites provide detailed information on the rehabilitation tax credit:
- National Trust for Historic Preservation, and
- National Park Service Technical Preservation Services.
Also, see the IRS real estate tax tips on the rehabilitation tax credit.