There are four factors that can help you decide whether your rehabilitation project would meet the basic requirements for the 20% tax credit.
1. The historic building must be listed in the National Register of Historic Places or be certified as contributing to the significance of a "registered historic district."
Buildings may be listed individually in the National Register of Historic Places or as a part of a historic district. Contact your local historic district commission, municipal planning office, or State Historic Preservation Office (SHPO) to find out if your building is listed.
If your property is located in a National Register district or a certified state or local district, it still must be designated by the National Park Service as a structure that retains historic integrity and contributes to the historic character of the district, thus qualifying as a "certified historic structure." Not every building in a district is contributing. When historic districts are designated, they are usually associated with a particular time period or "period of significance," such as "mid-1800s to 1935." In such a district, a 1950 office building would not contribute and would not be eligible for a 20% rehabilitation tax credit.
You can request the National Park Service to designate your building a "certified historic structure" by completing and submitting Part 1 of the Historic Preservation Certification Application.
Learn more about the application process.
2. The project must meet the "substantial rehabilitation test."
In brief, this means that the cost of rehabilitation must exceed the pre-rehabilitation cost of the building. Generally, this test must be met within two years or within five years for a project completed in multiple phases.
The cost of a project must exceed the greater of $5,000 or the building’s adjusted basis. The following formula will help you determine if your project will be substantial:
A — B — C + D = adjusted basis
A = purchase price of the property (building and land)
B = the cost of the land at the time of purchase
C = depreciation taken for the property (the property must be depreciable, such as in a business, commercial or other income-producing use)
D = cost of any capital improvements made since purchase
For example, Mr. Jones has owned a small Victorian rental cottage for a number of years. He originally purchased the property for $150,000 and, of that purchase price, $70,000 was attributed to the cost of the land. Over the past years, he has depreciated the building for tax purposes by a total of $41,000. He recently replaced the air conditioning system at a cost of $1,500. Therefore, Mr. Jones’s adjusted basis is $40,500 (or 150,000 — 70,000 — 41,000 + 1,500).
Mr. Jones intends to spend $50,000 to install a new roof, repair rotten siding, upgrade the wiring, and rebuild the severely deteriorated front porch, which will qualify as a substantial rehabilitation project. If he completes the application process and receives certification from the National Park Service that the rehabilitation meets the Secretary of the Interior’s Standards for Rehabilitation, Mr. Jones will be eligible for a 20% credit on the cost of his rehabilitation, or a $10,000 credit.
Some expenses associated with a project may not qualify for the tax credit, such as a new rear addition, new kitchen appliances, and landscaping.
Learn more about qualified rehabilitation expenses from the IRS.
3. The rehabilitation work must be done according to the Secretary of the Interior's Standards for Rehabilitation.
These are ten principles that, when followed, ensure the historic character of the building has been preserved in the rehabilitation. The Standards are applied to projects in a reasonable manner, taking into consideration economic and technical feasibility.
Learn more about the Standards for Rehabilitation.
4. After rehabilitation, the historic building must be depreciable, such as in a business, commercial or other income-producing use, for at least five years. Owner-occupied residential properties do not qualify for the federal rehabilitation tax credit.
The 20% credit is available only to properties rehabilitated for income-producing purposes, including commercial, industrial, agricultural, rental residential or apartment use. The credit cannot be used to rehabilitate your private residence.
However, if a portion of a personal residence is used for business, such as an office or a rental apartment, in some instances the amount of rehabilitation costs spent on that portion of the residence may be eligible for the credit.
Additional Eligibility Requirements
Additional factors and conditions can determine whether a potential project is eligible for the 20% tax credit.
- Buildings, not structures. Although the National Register of Historic Places lists structures, objects, and sites in addition to buildings, the 20% rehabilitation tax credit is only available for buildings. Treasury Regulation 1.48-1(e) defines a building as any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is, to provide shelter or housing, or to provide working, office, parking, display, or sales space.
- Physical integrity. The 20% tax credit for historic preservation is meant to preserve historic buildings, and not to create buildings that look old, but that are in effect new buildings. Thus, the credit is not available if the building does not have sufficient historic material to preserve at the outset of the rehabilitation. Once the integrity of a building has been lost due to deterioration, damage, or previous alterations, it can never be regained. While new material can exactly copy significant features, material integrity itself can never be re-created. It is important to select a building for rehabilitation that retains its basic physical integrity before rehabilitation.
- Non-historic surface coverings. Some historic buildings have been covered with non-historic surface coverings that obscure the building underneath. In these cases, it will be necessary to remove the covering to make sure that there is enough historic building material remaining that the building still qualifies as historic.
- Multiple buildings. Farms, mills, and other historic properties often have more than one building. For properties with multiple buildings that were functionally related historically, the rehabilitation certification decision will be based on the effect of the overall rehabilitation on the entire property, and not on each structure or individual component.
- Moved buildings. Moving a historic building can jeopardize its listing in the National Register of Historic Places, and special procedures must be followed to ensure its continued listing. Likewise, moving a building into or within a historic district may jeopardize its ability to contribute to the significance of the district. If a building will be moved as part of the rehabilitation project, consult with the SHPO as soon as possible.
- Demolition. Projects that involve demolition require careful planning to ensure approval whether whole buildings will be demolished or only parts of a structure.
Last updated: April 15, 2024