If you own a historic building, you may be eligible for significant savings through the rehabilitation tax credit. This federal incentive encourages renovating and restoring historic or old buildings, preserving architectural history while promoting economic revitalization.
Understanding the details of the rehabilitation tax credit can help building owners maximize its benefits and ensure compliance with the program’s requirements.
Seven Key Facts About the Rehabilitation Tax Credit
- The Credit Covers 20 Percent of Qualified Rehabilitation Costs
The rehabilitation tax credit allows building owners to claim a tax credit equal to 20 percent of qualifying expenses incurred during rehabilitation. This credit applies to expenditures related to restoring and improving a building, making it a valuable tool for those seeking to revitalize historic properties while offsetting project costs. - Purchasing the Building Is Not Eligible
It’s important to note that the rehabilitation tax credit does not cover the cost of purchasing the building itself. The credit applies strictly to expenditures associated with the rehabilitation process, such as structural improvements, repairs, and restorations that meet program guidelines. - Credit Distribution Over Five Years
Recent changes to the legislation now require taxpayers to claim the 20 percent credit over five years rather than all at once. This distribution begins in the year the building is placed into service. While this change may alter cash flow considerations for some projects, the phased approach ensures a steady benefit over time. - Elimination of the 10 Percent Credit for Pre-1936 Buildings
Previous versions of the rehabilitation tax credit included a 10 percent credit for non-historic buildings constructed before 1936. However, this provision has been eliminated. Only certified historic structures are eligible for the 20 percent credit, emphasizing the program’s focus on preserving buildings with recognized historical significance. - Transition Rule for Projects Meeting Specific Conditions
A transition rule offers relief for projects already underway when the law changed. This allows certain taxpayers to utilize the prior law if specific conditions are met:- The taxpayer must have owned or leased the building as of January 1, 2018, and ownership or lease must continue beyond this date.
- The taxpayer must have begun the substantial rehabilitation test’s 24- or 60-month period by June 20, 2018.
These conditions ensure that projects initiated under the old guidelines are not unfairly penalized by legislative changes. - Claiming the Credit Using Form 3468
Taxpayers claim the rehabilitation tax credit using Form 3468, Investment Credit, also used for various other investment-related credits. Proper documentation of eligible expenses and adherence to IRS requirements are essential for successfully claiming the credit. - Potential Savings and Broader Implications
The rehabilitation tax credit is not just a financial incentive—it also promotes community revitalization. By preserving historic buildings, taxpayers can contribute to local economic growth, boost property values, and maintain the cultural fabric of neighborhoods. In many cases, state or local programs may offer additional incentives, amplifying the benefits of rehabilitation efforts.
How the Rehabilitation Tax Credit Can Benefit You
For building owners, the rehabilitation tax credit represents a powerful opportunity to reduce project costs while contributing to the preservation of historic architecture.
If you’re considering restoring a historic property, it’s crucial to familiarize yourself with the program’s eligibility requirements and application process.
The financial advantages and the satisfaction of revitalizing a piece of history make this credit a compelling option for real estate investors, developers, and preservation enthusiasts.
Things to Consider Before Applying
Before diving into a rehabilitation project, be aware of the specific criteria your property must meet to qualify:
- Historic Designation: The property must be a certified historic structure, either listed on the National Register of Historic Places or located within a registered historic district and certified as contributing to the district’s historic significance.
- Qualified Expenditures: Expenses must directly contribute to the rehabilitation process, such as structural repairs, interior updates, or exterior restorations. Routine maintenance and landscaping costs are generally not eligible.
- Certification of Work: All rehabilitation work must comply with the Secretary of the Interior’s Standards for Rehabilitation. This ensures that changes preserve the building’s historic character.
Understanding these requirements is essential for ensuring your project qualifies for the rehabilitation tax credit and avoids costly setbacks.
Conclusion and Next Steps
The rehabilitation tax credit is a valuable tool for property owners looking to restore historic buildings. By providing financial incentives for qualifying projects, this credit makes preserving and revitalizing architectural treasures easier while enjoying significant tax benefits.
Whether you’re a seasoned real estate investor or a first-time property owner, this program can enhance your bottom line while contributing to your community’s cultural and historical heritage.
Please get in touch with our office for more information about the rehabilitation tax credit or other real estate-related tax incentives. We can guide you through the eligibility requirements, application process, and compliance standards, ensuring you maximize your benefits and achieve your project goals.
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