Tax Credits for Historic Buildings - 02-15-25

Historic buildings make a beautiful location for doing business. Unfortunately, many of them may seem out of the price range of small business owners. But, that’s not necessarily the case! The state and federal governments have an interest in preserving these properties, and they are willing to give you tax credits for buying and restoring a historic building. Listen in to learn how you can help your clients with this great tax benefit!

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Transcript

Welcome back everybody to another deep dive. This time, we're taking a look at a pretty cool tax strategy that could really be a game changer for your clients, especially those interested in real estate. Oh, yeah. Definitely a powerful one. And, you know, surprisingly, it often gets overlooked.

We're talking about historic building tax credits. Historic building tax credits. Alright. Now as tax professionals, I know you're always on the lookout for those unique ways to help your clients, you know, really maximize their tax savings, and this is definitely one that fits the bill. Absolutely.

And what makes these credits really stand out is that they're not just deductions. You know? They're not just chipping away at your taxable income. Right. We're talking about dollar for dollar reductions in their tax liability, and that can be huge.

Yeah. Especially for those clients who have a real passion for historic properties and wanna, you know, see those buildings preserved. Oh, for sure. It's a win win. You know?

They get to pursue their passion and save a bundle on their taxes. So So let's break this down because, you know, our listeners are already pretty savvy when it comes to tax law. But let's get into the specifics of these historic building tax credits. So to start, we've got two main federal tax credit options on the table. Okay.

Great. So first up, you've got a 20% tax credit, and that's specifically for rehabilitating certified historic structures. Certified. Okay. So that's where it gets interesting.

Right? It's not just any old building. Exactly. That's a key point. Certified means that the building has to be officially designated as historically significant, and that designation comes from the secretary of the interior, specifically through the National Park Service.

So there's a pretty rigorous process involved there. Oh, absolutely. It's not a rubber stamp by any means. Not every old building is gonna make the cut. So that's where I imagine getting in touch with the State Historic Preservation Office early on could be a smart move for your clients.

Oh, without a doubt. Early planning is crucial here. They can help determine if a property even has a shot at being eligible and guide them through that whole certification process, which can get pretty complex. Okay. Makes sense.

So what about those buildings that, you know, might not have that official historic stamp but still have that old world charm? Are there any options for those? There is. So if a building isn't on the national register but was constructed before 1936, there's a 10% tax credit available for rehabilitating those nonhistoric but still vintage structures. Interesting.

So even if it's not, you know, officially deemed a historic landmark, there's still potential for some tax saving. Exactly. Now I know our listeners, you all know that it is between deductions and credits, but it's worth emphasizing here. Right? We're talking about tax credits, not deductions.

Yes. And that's a big deal. Big difference. Because that means a direct reduction of your client's tax liability, dollar for dollar. We're potentially talking about thousands of dollars in savings here.

Yeah. You know, that can make or break a project. Right? Oh, abs Especially when you're dealing with, you know, restoring an older building, which can get pretty expensive. For sure.

For sure. For example, let's say a client is taking on a qualified rehab project, something that costs them, let's say, a hundred thousand dollars. Now that 20% federal tax credit, that translates to a cool 20,000 directly off their tax bill. Wow. That's not insignificant.

Not at all. And from a, you know, tax planning perspective, I imagine being able to project those savings accurately, that could be super valuable. Right? Oh, definitely. It helps your clients make informed decisions.

Do we go ahead with this project? Well, let's see what the numbers say after we factor in these tax credits. And then things get even more interesting, don't they, when you start layering in those state tax credits, which can be stacked on top of the federal ones. Oh, yeah. We're talking potential for some serious savings.

It gets exciting. I was just gonna ask about that. I know a lot of states offer their own incentives for historic preservation. Right. And those state credits can range quite a bit.

You might see a few percentage points in some states, but others go as high as 50% depending on the project specifics. So you can imagine when you combine those state and federal credits, the savings can be really substantial. Yeah. So in a state with a 50% credit, we're potentially looking at a client seeing, what, a total of 70 of their eligible rehab expenses being offset by tax credits. Exactly.

And that's why it's so important as tax professionals to really be in the know about those state specific incentives. It's not enough to just be familiar with the federal rules. You gotta understand how they play with the state programs to really, you know, maximize the benefits for your clients. Yeah. It definitely makes a big difference.

So, you know, I'm thinking some of our listeners might be wondering, okay. This all sounds fantastic, but who are the ideal clients for this type of tax strategy? You know, that's a great question. And, honestly, any client who's considering investing in real estate, especially older buildings, should at least be aware of these credits. It's part of our job to educate them on the possibilities.

Right. Right. Of course, you know, clients with a soft spot for history, a passion for preservation, they're gonna be naturally drawn to this. But even clients who are purely motivated by, you know, the bottom line, the financial returns, they can still benefit significantly from these incentives. Especially when you consider, you know, the potential to combine these credits with other tax benefits, like depreciation deductions.

Oh, yeah. Absolutely. It all adds up. And let's not forget about leveraging these credit for projects in those economically disadvantaged areas, you know, places that could really use a boost. Right.

So for instance, the new markets tax credit that can be used in tandem with the historic tax credits to encourage investment in those low income communities. Oh, I see. So we're not just talking about, you know, restoring some grand mansion or a fancy historic landmark. These credits could be a tool to revitalize neighborhoods, support those community development projects. Exactly.

And that's what makes this area of tax law so cool. You know? It's not just about numbers on a page. It's about finding these creative ways to use the tax code to achieve, you know, both financial and social goals. Yeah.

That's a great point. So we've established that these tax credits can be incredibly valuable. Right? But just like any tax strategy, there are some qualifications and requirements that need to be met. So let's get into the weeds a little bit.

What are some of those details that our listeners need to be aware of? Alright. Well, first and foremost, not just any old building is going to qualify for these historic tax credits. It's not a free for all. Of course not.

One of the key requirements is that the building has to be income producing. Income producing. Okay. So we're not talking about a personal residence here. Got it.

So if a client has this dream of buying, you know, a beautiful historic mansion and turning it into their primary home, the historic tax credit is off the table. Unfortunately, yes. That credit is designed to encourage the rehabilitation of buildings that are used for business or income generating purposes. Think apartments, think office buildings, retail spaces, even industrial buildings. Those are all good Ameriples.

Okay. So it's gotta be generating some income. Yes. But what about those situations where, you know, a client wants to use part of the building for their business and part of it for their personal residence? Is there any way to make the credit work in a case like that?

Oh, that's a scenario we see all the time. And luckily, the credit can be applied proportionally. So if a client, let's say, uses 60% of the building for their business and 40% for their home, they can claim the credit for that 60% of their qualifying expenses. Oh, so there's some flexibility there. That's good to know.

Absolutely. Flexibility is key. Now another really important factor to keep in mind is the recapture rules. Recapture. Yeah.

Always a fun topic. Right. Both the federal and state governments have these rules in place to make sure the tax credits are being used for their intended purpose, you know, to encourage those long term investments in these historic properties. So walk us through that a little bit. I know recapture can be a headache for some clients.

What's the gist of it? Sure. So at the federal level, there's a five year recapture period. And, basically, what that means is that if a client were to sell the property within five years of claiming that credit, they might have to pay back some of it. Oh, so it's not a free pass to just, you know, flip historic properties for a quick profit?

Not exactly. No. The government wants to see these buildings being preserved and used for their intended purpose over the long haul. Right. Makes sense.

Now when it comes to the state recapture rules, those can vary. So it's super important to do your homework, research those specific guidelines for your client's state. Yeah. Because those state tax laws can really add another layer of complexity, can't they? They sure can.

But, honestly, the potential tax savings often make it worth the effort. I agree. So let's say we have a client who's intrigued by this. Right? They found a property.

They think it might be eligible. They're eager to learn more. What are those practical steps we, as tax professionals, need to guide them through? What's our road map? Okay.

Great question. First things first, confirm that the building is actually eligible. Like we mentioned earlier, the National Park Service website is a great resource. You can check if the property is listed on national register of historic places right there. Right.

And don't forget to reach out to that state historic preservation office as well. Yes. Absolutely. They can offer some really valuable guidance and resources even for buildings that aren't on that national register. Definitely.

It's also crucial to connect your client with an architect who specializes in historic preservation. Ah, okay. So not just any architect will do. Right. And that's important for a couple of reasons.

First, like we've talked about, the secretary of the interior has very specific standards for what counts as a certified rehabilitation. And these standards, they demand a deep understanding of historical architectural styles, the building techniques, the materials used. An architect specializing in this area will have that expertise and can make sure the project meets those requirements. So it's not just about making the building look pretty. It's about preserving that historical integrity and making sure everything's up to code, meeting those federal guidelines.

Precisely. Plus, that qualified architect can also be a lifesaver when it comes to navigating all the paperwork. Oh, yeah. You know, getting the approvals and permits for the rehab work. They can be that liaison with the State Historic Preservation Office and help keep the project moving smoothly.

That's huge for clients who might be feeling overwhelmed by all the red tape. Right? Oh, absolutely. It takes a lot of the stress off their shoulders. And, you know, I imagine another advantage of working with a specialized architect is that they can spot those creative solutions.

Right? The ones that, you know, maximize the tax credits while still staying true to that historic character of the building. Exactly. They're not just checking boxes. They're actively looking for ways to help your clients get the most out of these incentives.

Yeah. So it's definitely worth bringing them on board early in the process. Right. And it seems like early consultation with both the tax adviser and the state preservation office is equally important. Oh, yeah.

For sure. Before your client signs anything or makes any commitments, you wanna make sure that building is eligible, that everyone understands the specific requirements for the tax credits, and that you've got a solid strategy in place. And, you know, let's be real here. While that historic charm is fantastic, the numbers have to work too. Absolutely.

Gotta make sure the project makes financial sense for your client. That means analyzing those costs, projecting the tax savings, and using tools like, you know, the modified internal rate of return or MIR to really assess the overall financial viability of the project. Right. So we're not letting those romantic notions of restoring a grand old building completely cloud the financial realities. We've gotta make sure it's a sound investment for our clients.

Exactly. And that's where we come in. Right? As tax professionals, we help them navigate this whole process, maximize those savings, and make sure those historic preservation projects are successful, both financially and historically. Absolutely.

Now this has been incredibly insightful. But before we jump into part two where we'll really dig into the specifics of what expenses qualify for these credits, I wanna touch on one more important aspect, and that's the alternative minimum tax or AMT. Yes. The AMT. That can be a bit of a boogeyman, can it?

A little bit. Now I know our listeners are familiar with the AMT, but can you just give us a quick refresher on how it can impact these historic tax credit projects? Sure. So the AMT, it's like this parallel tax system. Right?

And it was designed to make sure those higher income taxpayers are paying a certain minimum amount of tax regardless of, you know, all the deductions and credits they might be eligible for. The problem is, sometimes, the AMT can limit or even wipe out the benefits of certain tax breaks, and, unfortunately, the historic rehabilitation tax credit can fall victim to that. So you're telling me we have this amazing tax credit that has the potential to save our clients a ton of money, but then the AMT might swoop in and just take those savings away? That seems a little unfair. Yeah.

It can be frustrating, especially for those clients who are truly passionate about historic preservation and really wanna use these incentives. But the good news is we've got some strategies up our sleeves to help mitigate that AMT impact. Okay. Good. So what are some of those strategies?

How can we help our clients maximize those historic tax credits even when the AMT is lurking? Well, one of our most powerful tools is the ability to carry forward unused tax credits. So if a client is stuck with the AMT in a given year and can't fully use that historic tax credit, those unused credits, they don't just disappear. They can be carried forward to future years. So it's not a use it or lose it situation?

Not at all. We've got flexibility. The key is to plan ahead, you know, project our clients' income and tax liability over a few years to figure out the best time to claim that credit. So it's all about strategic Exactly. We need to make sure our clients are keeping track of all those qualified rehab expenses and that they're ready to claim the credit when they'll have the biggest impact.

This has been so helpful. I'm sure our listeners are already thinking about how they can use these insights to help their clients. We'll We'll be right back in just a moment to continue our deep dive into the world of historic building tax credits. Stay tuned. Welcome back to our deep dive into historic building tax credits.

Before the break, we were talking about the alternative minimum tax and, you know, how that can sometimes throw a wrench into things. But now let's get into the details. Let's talk about what expenses actually qualify for these valuable tax credits. Alright. So this is where it gets really interesting, especially for clients who are maybe picturing these grand renovations, you know, all the bells and whistles.

Right. But the IRS, they've got some specific guidelines for what types of expenses are actually eligible. Okay. So let's break it down. Give us some examples.

What are some common renovation costs that, you know, would typically qualify for the historic tax credit? Sure. So we're talking about a whole range of expenses that fall under this umbrella of rehabilitation. Rehabilitation. Okay.

This includes structural repairs. So think, you know, reinforcing foundations, maybe replacing some damaged beams. It also covers roof replacement, which can be a big one, upgrading electrical and plumbing systems to meet modern standards. And, of course, you know, restoring those beautiful original architectural features, those are the things that really give these historic buildings their character. Right.

Right. So let's say a client wants to replace those old drafty windows with replicas that are historically accurate, that would qualify. Absolutely. And it's not just about aesthetics either. Upgrading to those energy efficient windows, you know, while still maintaining that historic look.

That can have a huge impact on the building's value and those operating costs. Yeah. That's a great point. So it's not just preserving history. It's also promoting sustainability.

Win win. Exactly. Now I know this can be kind of a nuanced area. There are bound to be some gray areas. What are some expenses that, you know, people might think qualify but actually don't?

Yeah. I'm curious about that too. What are some of those common misconceptions? One big one is that people think the cost of acquiring the building itself is eligible for the credit. Oh, interesting.

But, unfortunately, that's not the case. The credit is specifically for those rehabilitation expenses, not acquisition costs. Got it. So the IRS is incentivizing the restoration of these historic gems, not just the buying and selling. Precisely.

And similarly, you know, those expenses related to the land itself, landscaping, sidewalks, parking lots, those are also not eligible. They consider that separate from the historic structure. Exactly. Okay. What about new construction?

Let's say a client wants to, I don't know, add a modern addition to a historic building. Would those costs qualify? That's a tricky one. Generally, no. New construction isn't eligible.

The focus is really on preserving what's already there, that existing historic fabric of the building. However, there might be some exceptions. Okay. So there's a little wiggle room there. Yeah.

A little bit. So if that new construction is deemed necessary for the rehabilitation of the historic part of the building and it's done in a way that's sensitive to the historical character of the property, you know, it blends in, it's compatible, then it might be okay. I see. So it's not always a black and white situation. It sounds like it's really important to have those conversations with the State Historic Preservation Office early on.

Oh, absolutely. They can offer guidance on how to, you know, approach new construction in a way that meets those standards set by the secretary of the interior. Oh, and what about personal property? So let's say a client is renovating a historic building and wants to furnish it with, you know, period appropriate furniture or maybe artwork. Are those costs eligible?

Unfortunately, no. Personal property like furniture, appliances, artwork, that's not included in the credit. The focus is really on the building itself, the structure. Okay. So those beautiful antique chandeliers and vintage rugs, they're not getting any tax breaks?

Sadly not. But, hey, focusing on the building itself often leads to even bigger tax savings in the long run. Good point. Now before we wrap up this part of our deep dive, I wanna go back to something you mentioned earlier. You talked about the importance of working with an architect who specializes in historic preservation.

Why is that such a critical piece of this puzzle? Right. It's crucial for several reasons. First, you know, like we've discussed, the secretary of the interior has those very specific standards for what qualifies as a certified rehabilitation. And to meet those standards, you need a deep understanding of those historical architectural styles, the building techniques, the materials used back in the day.

An architect who specializes in this area will have that knowledge, that expertise, and can make sure the project checks all the boxes. Right. So it's not just about making the building look pretty. It's about preserving its historical integrity in a way that meets those federal guidelines. Exactly.

And a qualified architect can also be super helpful when it comes to navigating that whole process of obtaining approvals and permits. They can kind of act as a go between with the State Historic Preservation Office and make sure the project goes smoothly from start to finish. I imagine that can be a huge relief for clients who might be feeling a bit intimidated by that whole process. Oh, absolutely. It takes a lot of the stress off their plate.

And I bet another advantage of working with a specialized architect is that they can come up with creative solutions. You know, find those ways to maximize the tax credits without compromising the historical character of the building. Exactly. They're not just ticking boxes. They're actively looking for ways to help your clients get the most out of those incentives.

So it sounds like bringing them on board early is really key. Oh, for sure. The sooner, the better. Their expertise can really shape the project and help ensure its success. This has been so insightful.

I'm really starting to see why a lot of tax professionals are drawn to this niche area. It's not just about numbers. It's about history, architecture, and finding that balance between preservation and modernization. Yeah. It's definitely a rewarding area to specialize in.

Welcome back to the deep dive. We've been exploring this world of historic building tax credits, and I'm really struck by, you know, how this topic brings together finance, history, and preservation. It's fascinating. Yeah. It really is.

And it's an area where you, as tax professionals, can truly make a difference both for your clients and for, you know, preserving these pieces of our nation's architectural history. Absolutely. So as we wrap up this deep dive, let's give our listeners some resources. You know, where can they go to learn more, stay updated on all the latest developments in this specialized area of tax law? Well, one of the best resources out there is the National Trust for Historic Preservation.

Their website's amazing. Oh, yeah. I've spent some time on there. It's great. It's like a treasure trove of information.

Seriously. You'll find everything from state specific details on those tax credits to guidance on navigating that whole application process. They even have a directory of qualified professionals, you know, including those architects who specialize in historic preservation that we've been talking about. Oh, that's so helpful. It's like a one stop shop for all things historic preservation.

Exactly. And, of course, we can't forget about the IRS. Right. Gotta go to the source. Their website might not be the most user friendly, but it's the place to go for all things tax related.

And they do have publications that are specifically dedicated to these historic building tax credits. Those can be really valuable for getting those insights and, you know, making sure you're on the right track. I'm hearing a theme here. It sounds like thorough research is key when it comes to these projects. Oh, absolutely.

Don't just rely on hearsay or, you know, some outdated information you found online. Really take the time to dig into those details. Understand the nuances of the tax code, and don't be afraid to consult with experts when you need to. And that emphasis on consultation, I think that's so important, especially in those early stages of a project. Before a client even thinks about signing on the dotted line for a historic property, they should be talking to their tax adviser for sure, but also that state historic preservation office.

Those early conversations can save everyone so much headache down the road. Yeah. For sure. It's about confirming eligibility, understanding those specific requirements for the credits, and coming up with a solid game plan right from the start. So being proactive, putting together that team of knowledgeable professionals, and really approaching these projects with a clear understanding of both the financial and the preservation goals.

Exactly. If you do all of that, you can really unlock the potential of these historic building tax credits. You know, you help your clients part in preserving these amazing pieces of history for, you know, generations to come. What a great way to put it. This has been such an insightful conversation, and I really hope our listeners are feeling inspired and empowered, you know, ready to dive into this unique niche.

It's such a cool way to combine your tax expertise with a passion for history and make a real difference. Couldn't agree more.

And to our listeners, thank you for joining us. We hope you found this episode informative and, you know, maybe even sparked some ideas for your own practice. Until next time, happy tax strategizing.