Find tax shelter for renovations

QTA Consultants, Ltd./Renata Bliumaite

The new tax law— Tax Cuts and Jobs Act (TCJA)— preserves a major tax credit for building renovations, but with certain modifications.

Strategy: Obtain certification for a “historic structure.” If you meet the requirements, you can claim a 20% credit for the renovations, albeit at a slower pace than you could before the new law. Conversely, the TCJA completely eliminates another tax credit, the rehabilitation tax credit (“rehab credit”).

Here’s the whole story: Previously, you could claim either a 10% rehab credit or a 20% historic structures credit.

1. Rehab credit: To qualify for the 10% credit, the building must have been placed in service before 1936. Also, the work was required to be substantial in nature (i.e., expenses over a two-year period in excess of the greater of $5,000 or the adjusted basis of the building and its structural components). In addition, specific wall retention requirements had to be met. Finally, the building must have been placed in service by the taxpayer before the rehabilitation work was begun. Qualified rehabilitation expenses included architectural and engineering fees, site survey and development fees, legal expenses, and other construction-related costs, as long as they were added to the property’s basis, reasonable in amount and related to services performed. New law change: Now the walls have tumbled down. The rehab credit is no longer available for expenses incurred after 2017, although some technical transitional rules may apply. See your tax pro for details.

2. Historic structures credit: As the name implies, the historic structures credit is only available for renovations to buildings of historical significance. But this covers more places than you might think. It doesn’t have to be a residence from the 1700s where George Washington slept or an antebellum mansion from the Civil War era. For instance, you may qualify for the credit by renovating a brownstone or row house from a historic part of a downtown area. Unlike the rehab credit, you don’t have to bend over backwards to qualify for the historic structures credit. For instance, there are no age or wall-retention restrictions. However, you must meet two other requirements:

• The building must be listed on the National Register of Historic Places or located in a registered historic district and certified by the Secretary of the Interior as being historically significant.

• The rehabilitation must also be certified. This means the finished product must retain the original historic character (but not necessarily the original use) of the building. The National Register of Historic Places currently lists more than 92,000 locations that are eligible for the credit. Visit the website at www. cr.nps.gov/nr/about.htm. New law change: Under the TCJA, the credit must be claimed ratably over a five-year period. In effect, you obtain a 4% credit each year for five consecutive years. This dilutes the benefit of the credit somewhat because it takes longer to cash in. In conjunction with this change, a previous provision requiring investors to forfeit part of the credit if it was sold within five years has been repealed. The application for the historic structures credit must be submitted in duplicate to the State Historic Preservation Office (SHPO). The SHPO retains a copy and forwards the other copy to the National Park Service (NPS).

Tip: Only the NPS approves projects for the credit.