Take your place in history
Tax-smart real estate investors can capitalize on a unique tax discount for making specific building renovations.
Strategy: Unlock the “historic structure” tax credit. By meeting specific tax law requirements, investors can qualify for a 20% credit on renovation costs, subject to changes made by the Tax Cuts and Jobs Act (TCJA). The TCJA rules have been recently clarified by the IRS.
Here’s the whole story: The historic structures credit has a history dating back to 1976. Prior to the TCJA, a rehabilitation tax credit was available as an alternative to the historic structures credit. However, the TCJA eliminated this tax break, leaving the historic structures credit as the remaining benefit. As the name implies, the historic structures credit is exclusively available for renovations to buildings of historical significance. This covers a broader range than you might think. It need not be the childhood home of a U.S. president or a mansion owned by a titan of industry. For instance, renovating a brownstone or a row house from a historic part of a downtown area may qualify for credit. Over 45,000 structures have been approved for this credit since the inception of the program. To qualify for the credit, two key requirements must be met:
• 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 receive certification. This entails the finished product retaining the original historic character of the building, but not necessarily its original purpose. At last count, the National Register of Historic Places lists about 95,000 structures and more than 2,300 designated historic districts that are eligible for the credit. Visit the website at https://nationalregisterofhistoricplaces. com for more information.
Key tax update: Under the TCJA, the credit must be claimed proportionally over the course of five years. This means a 4% credit each year for five consecutive years, totaling 20%. This somewhat dilutes the benefit of the credit because it takes longer to benefit from the tax savings. In conjunction with this change, a previous provision requiring investors to forfeit part of the credit if sold within five years was repealed. Finally, the historic structures credit application must be submitted in duplicate to the State Historic Preservation Office (SHPO). The SHPO retains one copy and forwards the other to the National Park Service (NPS), which approves projects for the credit.
Tip: State tax breaks for historic structures may also be available.