Tax Benefits of Owning a Historic Property

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If you own a historic property or are considering buying one, there are more advantages than just unique and original architecture and design. There are also several tax incentives at the federal, state, and local levels that are put in place to encourage homeowners to preserve these historic properties and rehabilitate them appropriately rather than tear them down in favor of new construction.

Here are some ways you can take advantage of tax incentives if you’re the owner of a historic property.

Federal Historic Preservation Tax Incentive

The federal government of the U.S. offers incentives to encourage the rehabilitation and re-use of historic structures. While the government may be dishing out monetary incentives for such activity, it’s also getting money back in the form of improvements in cities. In fact, the Federal Historic Preservation Tax Incentive is one of the most successful and cost-effective revitalization programs in the country.

The catch? It’s not applicable to owner-occupied historic homes. Instead, it’s geared towards commercial buildings or income-generating private properties. However, if you have a home office or rent out part of your house, you can apply for the 20% tax credit for any improvements made to the income-generating space.

Once your property is a designated as historic, the federal government will hand out either 10% or 20% of the money you spend improving it (as long as the work proposed is approved).

20% Tax Credit – A 20% income tax credit is available for owners to rehabilitate historic, income-producing properties that have been certified as historic structures through the National Park Service. In order to be eligible for this 20% tax credit, a home needs to be at least 50 years old without many changes having been done to it over the years, and renovation expenses need to total a minimum of $5,000.

10% Tax Credit – A 10% tax credit is available for rehabbing non-historic buildings that were built before 1936 that don’t qualify for the 20% tax credit. In order to be eligible for this 10% tax credit, the building needs to be rehabilitated for non-residential use.

It should be noted that owners cannot take advantage of both credits – only one or the other.

About 1,200 projects to rehab historic properties are approved annually by the Technical Preservation Services, leveraging about $6 billion each year in private investment to improve historic homes and buildings all over the nation.

State Tax Credit

Owners who are looking for tax breaks for homes they actually live in should look to the state for monetary credits. Unlike the federal tax incentives that are only applicable to investment properties, many states – including California – offer incentives for preserving owner-occupied historic properties.

State governments are willing to hand out money to rehab qualifying historic homes in an effort to help revitalize neighborhoods. Since historic properties are often located in economic downtown areas, any increase in value of a historic home as the result of renovations can actually help boost the value of the surrounding area, which is why state governments are open to helping out.

In California, Bill AB 1999 was developed not long ago to speed up the process of preserving and renovating historic structures. It offers a 20% state tax credit to developers who choose to restore old structures listed on the National Register of Historic Places rather than demolish them. Again, this credit is extended only to income-generating properties rather than owner-occupied homes.

Private homes are eligible for smaller tax credits up to $25,000, as long as they can show that any improvements made to the property would have a positive effect on the surrounding community.

Other State Incentives in California

Most states in the country offer programs to lower state property taxes for historical structures, and in California, this is known as the Mills Act Property Tax Abatement Program. Property owners get reduced property taxes from the local government that grants the tax incentive in exchange for preservation of historic properties. If eligible, property taxes are then recalculated according to a specific formula under the Mills Act and Revenue and Taxation Code.

It should be noted that the criteria for eligible properties varies from one jurisdiction to another, and not every local government participates in this program.

The Bottom Line

Preserving and improving your historic property takes some capital, but luckily the government has programs in place to help out financially. In addition to these tax incentives, you may even want to check with a tax lawyer who’s experienced in dealing with local property tax incentives to see if there are any other grants or breaks that you can tap into to help with historic preservation.

One thing is for certain – tax rules for the preservation of historic properties are typically complex. Some incentives may be only application to investment properties only while others might encompass owner-occupied homes. As such, it’s important to speak with your accountant to verify precisely how you can take advantage of these tax incentives.