It was Benjamin Franklin who stated, "Nothing can be said to be certain, except death and taxes." But he didn't realize that if you own property from his era, you can avoid the second. Historic property can be a nightmare -- remember Tom Hanks and Shelley Long in "The Money Pit"? -- but these buildings have civic value. If you're willing to sink money into a historic property, the government is generally willing to help you out on the other side.
Myriad tax incentives exist at the local, state and federal levels to encourage responsible citizens to pony up the costs of upkeep on historic property. In this article, we'll look at some of the best of the bunch, including federal breaks and the most common state and local breaks. Additionally, it's worth checking with your state historic preservation office or a tax attorney experienced with local property tax incentives to see if grants, breaks or endowments exist to help with local historic preservation [source: National Trust for Historic Preservation].
National Park Service
Does it surprise you that the National Park Service (NPS) is the first stop in your quest for historic property tax breaks? In fact, the NPS partners with the IRS to administer the Federal Historic Preservation Tax Incentives Program. Their certification application for a listing in the National Register of Historic Places (NRHP) is the golden ticket to tax breaks and the best way to designate your property as a historic site [source: National Park Service]. Note that to get federal tax breaks, not only must you get your property listed on the NRHP, but you must also provide specific plans for renovation to the site. It's these renovations that you'll get a break on.
If you're thinking about buying into an existing historic property, perhaps with the thought of further renovations, check the NRHP to make sure it's already registered (or consider making successful registry a contingency of sale) [source: National Park Service].
Federal Historic Preservation Tax Incentive
It's just that easy: Once your site is a designated historic property, the federal government will kick back 20 percent of the money you spend renovating it (pending application approval). Again, the applications for both designation and proposed renovations are available through the National Park Service.
However, there are a couple of catches. First and foremost, the property must generate income. You can't get this tax break for renovating your home -- that is, unless you have a home office or rent out space in your home, in which case you can apply for the 20 percent credit for renovations to this income-generating space. (This is a frequent tax break for bed-and-breakfasts.)
Second, your proposed renovations must be "consistent with the historic character of the property" [source: National Park Service]. The Secretary of the Interior provides a list of 10 guidelines that a renovation project must follow in order to be eligible for the 20 percent credit.
State Tax Credit
If you live in one of the 31 states (as of 2011) that have adopted tax credits for historic building renovations, you may be able to double up your savings [source: National Trust for Historic Preservation]. The thought in most states is that older, historic buildings are frequently found in traditional economic centers like downtowns, and the increased value due to renovation doesn't stop at your property boundary. Renovating a property can help renovate a neighborhood, and your state may be willing to help you do it.
One big bonus: Many state tax incentives aren't limited to income-generating buildings. In other words, while the federal tax incentives are limited to businesses, you may be able to get a state tax incentive for renovating your own home. Additionally, you may not need to be listed individually in the NRHP in order to be eligible. Instead, consider researching this credit if your property contributes to the character of a designated historic district or if it's been locally designated as a landmark.
Other State Incentives
In California, it's the Mills Act. In Oregon, it's the Special Assessment of Historic Property Program. In Wisconsin, it's the Supplemental Historic Preservation Credit. In Arizona, it's the Historic Property Tax program.
Whatever it's called, many -- if not most -- states have programs in place to reduce the state property taxes of historic buildings. Of course, with programs administered at the state level, requirements and benefits differ depending on where your property is located. A quick online search that includes the terms "tax, historic and state" should land you in the right place quickly.
Note that these programs are very different in the kinds of breaks they offer. While the previous pages detailed ways to get breaks on renovations, many individual state credits offer breaks on the property taxes you pay every year. Instead of having to spend money to save money, these state programs can help you save money outright.
Basically, an easement is an agreement between a property owner and a representative of a historical preservation society. (In fact, a couple of the state programs you'll run across fit into this category.) In exchange for your promise to maintain the property's historic character, you can receive fabulous benefits in the form of reduced income tax, estate tax or property tax.
Remember that an easement can be forever. Once signed, sealed and delivered, it's yours, and it's filed as a deed with the title of your property, passing down to any future owners. This may be beneficial -- what potential buyer doesn't like reduced fees and, maybe, the thought of living in a verified historic building? But it might also scare off future buyers who had their hearts set on converting your Victorian into a Gregorian (or worse!).
Preservation societies funding easements exist at the city, county and state levels, and they can be found easily through a quick Internet search.
10 Percent Rehabilitation Credit
OK, so you're having a hard time being designated as "historic." You might still be able to get a tax break for renovations on your business. If your building was put into service before 1936, you can apply for and receive 10 percent back on the cost of renovations that preserve the building's original character. For example, if you spent $100,000 to renovate the 1935 building that houses your business, you could receive $10,000 in tax credits.
Like the 20 percent renovation tax credit for buildings listed on the NRHP, this 10 percent rehabilitation credit for business in buildings built before 1936 is administered jointly by the National Park Service and the IRS [source: Internal Revenue Service].
There are many private philanthropic organizations dedicated to preserving historic properties. If you're the owner of one of these properties, you might benefit from their largesse. Generally, these grants are for renovations or preservation, totaling a percentage of the amount you spend or, in some rare cases, granting preservation funds outright.
For example, the Johanna Favrot Fund for Historic Preservation grants between $2,500 and $10,000 for nonprofit or government agencies renovating historic properties. Similarly, many businesses' philanthropic activities include preservation; for example, the American Express Partners in Preservation program offers grants for the renovation of historic buildings and landmarks.
A plethora of other grant opportunities exist for private, public and nonprofit applicants. The best place to start searching for these grants is through your state preservation office or the nearest office of the National Trust for Historic Preservation.
Here's the situation: You've placed a bid on your historic dream property, contingent on inspection. However, the inspection finds $35,000 worth of damage -- a historic setback indeed. Luckily, the federal government has an incentive to see the sale go through, namely that a decrepit, unsellable house or business can drag an entire neighborhood down, while a renovated historic property can revitalize a neighborhood. Accordingly, the Federal Housing Administration (FHA) offers a program to write $35,000 at favorable terms into pending mortgages for the purpose of historic property renovation.
If you're buying a fixer-upper, you might be on your own. But if you're buying a historic fixer-upper, you might be in luck.
In a world without popping bubbles, your house would naturally gain a bit of market value every year. But this means that as the appraised value of your house rises, your property taxes go up as well. That is, unless you engineer a freeze.
Working with your local historical preservation office, main street revitalization group or historical society, you may be able to work out a freeze on property tax increases. Freezes commonly last in the neighborhood of 10 to 15 years, and they're usually based on plans to renovate your historical property or a promise to keep said property as-is without significantly altering its character.
Imagine you donate a portion of your land to a nonprofit conservation trust. You're likely to receive a hefty tax break due to the deduction borne of your charitable donation, and you'll also pay less property tax due to the decrease in your property value (remember: you donated a chunk of it, so what remains is worth less).
The same is true of developed property. Often, if you own a historic property, you can work out a way to donate its facade, interior, landscaping or any other feature that makes it historic. Imagine you deed the front of your historic property to a preservation organization. The value of your property's facade is a charitable donation. And this same value is technically deducted from your home value, reducing your property taxes. Again, you pay for these tax benefits in the form of renovation restrictions.
For more information, check out the links on the next page.
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- Emery, John K. "What Makes a Property Historic?" (March 15, 2011) http://www.jkemery.com/HistoricHomes
- Illinois Historic Preservation Agency. "Property Tax Assessment Freeze." 2007. (March 15, 2011) http://www.illinoishistory.gov/ps/taxfreeze.htm
- Internal Revenue Service. "Publication 526." (March 15, 2011) http://www.irs.gov/publications/p526/ar02.html
- Internal Revenue Service. "Rehabilitation Tax Credit -- Real Estate Tax Tips." Feb. 9, 2011. (March 15, 2011) http://www.irs.gov/businesses/small/industries/article/0,,id=97599,00.html
- Koreto, Richard J. "Tax incentives for historic preservation." Will Nesbitt Realty LLC. Jan. 2, 2010. (March 12, 2011) http://condo-alexandria.com/2010/01/02/tax-incentives-for-historic-preservation/
- National Park Service. "Historic Preservation Tax Incentives." (March 12, 2011) http://www.nps.gov/hps/tps/tax/hpcappl.htm
- National Park Service. "National Register of Historic Places." (March 12, 2011) http://nrhp.focus.nps.gov/natreghome.do?searchtype=natreghome
- National Park Service. "What are the Secretary of the Interior's Standards for Rehabilitation that are used to evaluate projects that apply for the 20% tax credit?" (March 12, 2011) http://www.nps.gov/hps/tps/tax/incentives/essentials_4.htm
- National Trust for Historic Preservation. "Preservation Contacts." (March 12, 2011) http://www.preservationnation.org/contacts/
- National Trust for Historic Preservation. "State Rehabilitation Tax Credits." (March 12, 2011) http://www.preservationnation.org/issues/rehabilitation-tax-credits/state-rehabilitation-tax.html
- Preservation North Carolina. "Preservation Easements." (March 12, 2011) http://www.presnc.org/Property/Preservation-Easements