There it stands, your client's 100-year-old, rickety, vermin-infested barn or former hotel or whatever the darn thing once was. And she's considering what to do with it. There are two words that can help her decide and, no, we don't mean "wrecking crane."
It's about the tax credits, and potential for the property to even become income producing. Now we're talking, right? Federal and state tax incentives can offset the costs of rehabbing an old building.
Here's a snapshot of what's available.
At the federal level, the historic tax credit that took effect in 1982 and was reformed in 1986 includes these provisos:
- 10 percent credit for qualified rehab expenses for any non-historic, nonresidential commercial building placed in service before 1936.
- The 10 percent credit requires retention of 50 percent of the existing internal walls and 75 percent of the external walls and internal structural framework.
- 20 percent credit for any historic structure listed in the National Register of Historic Places, or one that contributes to the character of a national historic district or is certified as eligible for being on the National Register.
- "Qualified" rehab expenses are the greater of $5,000 or the building's adjusted basis for the 10 percent and 20 percent credit.
- The tax credits are available only for properties that will be income-producing.
The tax credit often is paired with low-income housing and new markets tax credits.
Be aware that a proposed comprehensive tax revision in the House would repeal the federal historic tax credit along with a couple hundred other programs, says Shaw Sprague, associate director of government relations and policy for the National Trust for Historic Preservation. The trust is pushing legislation called Creating American Prosperity Through Preservation (CAPP), which would increase the credit from 20 percent to 30 percent for smaller projects, change the pre-1936 age requirement to 50 years or older, increase nonprofits' access to the credit, and allow extra credit for increased energy efficiency.
At the state level, more than 30 states offer tax credits for preservation projects. And states offering these benefits find that the credits increase the use of the federal tax credit by as much as $35 million in certified expenditures.
But state programs vary dramatically in tax credit limits and transferability of the credits, according to a preservation trust study.
Montana, for example, gives a 5 percent tax credit for rehabbing a commercial building when the federal 20 percent credit is used, according to the study. Kansas, Kentucky, Oklahoma, and Missouri allow the credit holder to sell the credit to a third party with enough tax liability to use it. And some states allow the credit to be allocated to partners or shareholders.
New Hampshire doesn't have a state tax credit program, but does offer tax incentives for owners of barns and other agricultural buildings considered scenic landmarks that help tell the story of the state's farming history.
A 2002 state law allows owners to ask their local towns for a minimum 10-year discretionary preservation easement and agree to maintain the building's historic character. In exchange, owners can get tax relief as a 25 percent to 75 percent reduction in the building's assessed value. And maintenance and repairs won't increase the assessed value. Easements also can be renewed.
But let's face it, preservation efforts are a labor of love. Farm owner Mark Longley in Sandwich, N.H., got an easement for his 1840 barn, but admits he saves only about $600 a year with the 75 percent incentive because barns aren't assessed at the same rate as homes are anyway. Last year alone, Longley spent $80,000 on repairs to the barn, making it a "working barn" that houses animals again after 100 years.
"To be frank, I think a lot of the barns that go into easements are barns that are owned by folks who have the resources and will to preserve them anyway", he says. "If they can afford it, they would preserve it anyway."
That holds true at the national level, too. As Sprague puts it",All said and done, historic tax credits will only cover a fraction of your total development cost. Very often, though, these credits fill a critical financial gap that means the difference between demolition and preservation of endangered historic properties."
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.