Tax Credit to Rehabilitate Old or Historic Buildings
By Attorney Stephen Fishman
The Rehabilitation tax credit helps defray part of the cost of rehabilitating old buildings. It is intended to help preserve historic buildings and encourage businesses to stay in older economically disadvantaged areas, such as many inner cities.
There are actually two different rehabilitation tax credits:
- a credit equal to 10% of part of the cost of rehabilitating non-historic buildings built before 1936 that are used for nonresidential commercial purposes, and
- a 20% credit of part of the cost for the rehabilitation of 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. Only one applies to a given project. Which credit applies depends on the building—not on the owner’s preference.
The 20% credit can be obtained for commercial, industrial, agricultural, and residential rental buildings, but it is not available for properties used exclusively as the owner’s private residence. To get the 20% credit, the Secretary of the Interior must certify to the Secretary of the Treasury that the project meets their standards and is a "Certified Rehabilitation." You obtain 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 historical status by contacting your state historical 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.
How Much Work Must You Do?
Before you start looking to buy an old building, keep in mind that to get either credit your rehabilitation efforts must be substantial. Cosmetic improvements won’t do. Your rehabilitation expenditures must exceed the greater of $5,000 or the adjusted basis of the building and its structural components. The adjusted basis is generally the purchase price, minus the cost of land, plus improvements already made, minus depreciation already taken.
Real estate pros call such extensive rehabilitation projects “gut rehabs.” 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—a very substantial undertaking.
Collecting the Credit
You won’t get the credit until the year the building is placed in service—that is, returned to use.
Example: In 2011, Beverly purchased a nonhistoric residential hotel built in 1930 for $100,000. The building’s adjusted basis is $80,000. Beverly spends $90,000 in 2011 to restore the hotel and returns it to service in 2012. She’ll get a $9,000 credit in 2012 (10% x $90,000 = $9,000).
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 is placed in service, 100% of the credit must be paid back. For properties held between one and five years, the amount to be paid back is reduced by 20% per year.
The following websites provide detailed information on the rehabilitation tax credit: