Written By: Daniel Rowe, CPA, Tax Manager
This article was originally published in BIS (Business In Savannah) on September 16, 2013.
Few things are more discouraging to see in a city than run-down buildings and once-vibrant neighborhoods in a state of disrepair. It gives visitors a sense that the city, or at least that section of it, is in decline and no longer relevant.
More importantly, it gives residents of that neighborhood a feeling of hopelessness.
The reluctance of investors or legislatures to allocate resources toward restoration of a neighborhood’s historic properties creates the perception that the neighborhood is no longer viable.
In addition to being fire hazards and safety concerns, decaying structures attract crime, contribute to blight and perpetuate a cycle of despair.
Contrast this to a cycle of hope when new businesses, residences and community buildings are born from the shambles of aging properties through historic rehabilitation efforts.
Cities that promote this approach are able to maintain a charm and character that attract visitors and improve residents’ quality of life. Recognizing the economic and cultural significance of rehabilitating historic structures, the federal government decided to offer incentives builders and investors to stimulate the growth of rehabilitation projects.
As usual, the tax code was the tool of choice for this stimulus, and in 1976 a rehabilitation tax credit was passed into law.
A quarter-century later, Georgia followed suit and established a state tax credit program. The federal program as it exists today was established through the Tax Reform Act of 1986. Both the federal and state programs give building owners valuable tax credits in exchange for preserving and rehabilitating historically significant properties.
As the oldest city in Georgia, Savannah has clear historic significance, as do its buildings. This translates into countless opportunities for federal and state tax credits in connection with major renovation of Savannah properties.
A short walk around Savannah presents hundreds of examples of modern and efficient houses, apartments, university buildings, restaurants and commercial buildings that have been historically preserved and repurposed. In this land of opportunity, it is important to understand the tax benefits that can be realized through historic preservation and to have a basic idea of the steps to follow to obtain the credit.
The tax credits can be significant enough to make a project economically feasible by helping to defray construction costs or attract investors to the project. At a minimum they provide a financial bonus to the owner who undertakes a qualified rehabilitation project.
The federal credit amounts to 20 percent of the qualified rehabilitation expenditures on any certified historic structure. The Georgia credit is generally 25 percent of the qualified rehabilitation expenditures or 30 percent if the property is located in a specific target area.
To put this in perspective, a qualified rehabilitation project that costs $100,000 may generate $20,000 of federal and $30,000 of Georgia tax credits. Since a credit is a dollar-for-dollar reduction of tax, this amounts to a 50 percent return on investment in tax credits alone.
To qualify for the 20 percent federal credit, four general requirements must be met:
1) The building must be listed in the National Register of Historic Places or be certified as contributing to the significance of a registered historic district.
2) The rehabilitation must be substantial, meaning the project costs exceed the greater of $5,000 or the building’s adjusted basis.
3) The work must be done in accordance with the Secretary of the Interior’s Standards for Rehabilitation.
4) The building must be used in a trade or business (including rental property).
Once these requirements are met, the credit can be claimed based on all qualified expenditures incurred before, during and after a specified measuring period. The credit is claimed on IRS form 3468 with the property owner’s tax return, generally for the tax year in which the rehabilitated building is placed in service.
The Georgia tax credit also has three general requirements:
1) The building must be listed in the Georgia Register of Historic Places or certified by the Department of Natural Resources as contributing to the historic significance of a Georgia Register Historic District.
2) The rehabilitation costs must exceed a specific threshold. For business properties this is the greater of $5,000 or the adjusted basis of the property.
3) DNR must certify that the improvements are consistent with their Standards for Rehabilitation.
Unlike the federal credit, a personal residence can qualify for the Georgia tax credit. A homeowner doing substantial renovation may overlook this.
To ensure successful realization of the available tax credits, the following steps should be followed before beginning the rehabilitation work:
1) Consult with a tax adviser to determine whether the potential credits will be relevant to your tax situation.
2) Determine whether your project meets the substantial rehabilitation test and the other requirements outlined above.
3) Apply for certification from the National Park Service regarding the historic significance of the property and the proposed rehabilitation work.
4) Apply for similar preliminary certification from the Georgia DNR.
Repurposing historic properties continues the cycle of life, resurrecting neglected or unused structures into vibrant, functional components of the community.
Even if the intrinsic societal benefits of rehabilitation are not the owner’s motivation for renovating an old building, they should still be aware of the tax benefits that await them.
A public awareness of these credits helps ensure builders, developers and owners pursue them and leave us with a city in constant vitality.
To access the original article, click HERE.