An owner or purchaser of a historic property certified or registered with the National Park Service (or a property in a registered historic district) must spend at least 100 percent of the purchase price or the adjusted basis value of the building on renovations. For example, if a purchaser buys a qualified structure for $100,000, he or she has to spend at least $100,000 on renovations.
If the state preservation office and the National Park Service approve the project, the owner can take a 20-percent credit against federal income taxes. The tax years affected span from the year prior to the project's completion to 20 years in the future, explains Mark Primoli, national office analyst with the IRS Rehabilitation Tax Credit Program in St. Paul, Minnesota. Homebased business owners would only be allowed to take the credit equal to the percentage of the home the office occupies.
Renovations can range from restoration of the building's exterior to new electrical wiring or plumbing. New appliances, landscaping, driveways or anything else not part of the physical structure don't qualify, says Mark Primoli, national office analyst with the IRS Rehabilitation Tax Program in St. Paul, Minnesota. All exterior work must maintain the historic integrity of the property, he adds. What you do on the inside is not as critical as the exterior.
For property resold or removed from business use within five years of the completion of the renovation, owners will have a recapture liability equivalent to 20 percent of the tax credit for each year under five, Primoli says. If, for example, the owner receives a $100,000 tax credit and sells the building after three years, he or she will have to pay back $40,000 (two of the five years remaining at 20 percent per year) in tax credit. As with all homebased businesses, deductions taken for office space would also be computed against the base value of the property, resulting in a liability at resale.
It's not a simple program, and it can be nerve-wracking to navigate through all the required paperwork, says Charles Uhl, owner of Historic Preservation Services, a Pittsburgh-based consulting firm for developers seeking the tax credit. Between obtaining state certification of a property's historical significance and then wading through the tax-rebate program, Uhl recommends applicants work with someone who knows the ropes, including having a keen knowledge of architecture, construction and architectural history.