Take a Page Out of History — and Collect a Valuable Tax Break

Posted on Wednesday, August 29, 2018

Whether you realize it or not, you may have the chance to "make history." If you renovate investment property that qualifies as an historic structure, you can claim a federal tax credit of 20 percent of the cost of the work. There may also be state tax incentives.

The federal historic structures tax credit is similar to the 10 percent tax credit available for rehabilitating commercial properties Essentially, you must meet the same criteria needed to claim the rehabilitation credit (for example, 75 percent of the external walls must be retained) but there are three key differences:

1.

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 age of the building isn't a factor.

2.

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. A building will be treated as being certified at the time it is placed in service as long as the taxpayer reasonably believes that the building will meet the certification requirements and has requested a determination from the Department of the Interior.

3.

The completed building can be used for residential rental purposes, as well as commercial or industrial applications.

To begin the process, you must request certification of a historic structure from the Secretary of the Interior (on NPS Form 10-168c). If you qualify, attach a copy of the final certification to an IRS form with the first tax return filed after receiving the certification.

What Kind of Expenses Qualify for the Tax Credit?

    You can include any expenditure for a structural component of a building, including walls, partitions, floors,  ceilings, permanent coverings such as paneling or tiling, windows and doors, components of central air conditioning or heating systems, plumbing and plumbing fixtures, electrical wiring and lighting fixtures, chimneys, stairs, escalators, elevators, sprinkling systems, fire escapes, and other components related to the operation or maintenance of the building.
    In addition to the "hard costs" listed above, there are "soft costs" that qualify. They include construction period interest and taxes, architect fees, engineering fees, construction management costs, reasonable developer fees, and any other fees paid that would normally be charged to a capital account.
    However, a number of expenses do not qualify for the credit, such as appliances, cabinets, landscaping and outdoor lighting that is remote from the building.

Under tax law, the IRS has the discretion to grant a reasonable extension of time to make an election to claim the tax credit. However, the rules for qualification are strict. In one IRS private letter ruling, a taxpayer claimed he was unaware he could claim the historic structure credit for renovation work on a two-story red brick building he owned. Therefore, he failed to file the application with the Department of Interior before the property was placed in service. The application was eventually filed more than two years after the property was placed in service, so it technically did not meet the requirements.

However, the taxpayer requested relief from the IRS, claiming that he had used the same local tax professional for several years to prepare his federal tax returns and to provide related tax advice. He provided all the information regarding rehabilitation of the property, but the tax professional never explained that the taxpayer might qualify for the historic structures credit.

Under these circumstances, the IRS granted the taxpayer an extension of time to claim the credit on an amended return. (IRS PLR 200528002)

Moral of the story: You might not be as fortunate as the taxpayer in the ruling. Seek assistance from your real estate attorney to ensure that you meet all the certification requirements for this valuable tax credit on time.

Posted in Tax Topics For Individuals

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.