There are still so many great opportunities to invest in historic properties in Downtown Richmond and it’s surrounding ‘Hills,’ including one of my favorites, Church Hill. Many people who buy a home in hopes to renovate it, aren’t aware of the many resources available to them as an incentive to restore the city’s historic value and subsequently enhancing local employment and community activity. Direct from Virginia’s Department of Historic Resources is this great question and answer segment of what qualifies, how to get started and other general knowledge for your next investment!
What are the rehabilitation tax credits?
The rehabilitation tax credits are dollar-for-dollar reductions in income tax liability for taxpayers who rehabilitate historic buildings. Credits are available from both the federal government and the State of Virginia.
The amount of the credit is based on total rehabilitation costs. The federal credit is 20% of eligible rehabilitation expenses. The state credit is 25% of eligible rehabilitation expenses. In some cases, taxpayers can qualify under both programs, allowing them to claim credits of 45% of their eligible rehabilitation expenses.
What buildings qualify for the tax credit program?
The credits described above are available only for Certified Historic Structures, which are defined as follows:
Under the federal program, a certified historic structure is one that is either:
- Individually listed on the National Register of Historic Places, or
- Certified as contributing to a district that is listed
Under the state program, a certified historic structure is one that is:
- Individually listed on the Virginia Landmarks Register, or
- Certified as eligible for listing, or
- Certified as a contributing structure in a district that is so listed.
With a few exceptions, most Virginia properties are listed on both registers. Note, however, that national and Virginia register historic districts may be different from locally designated historic districts. Certification that a building contributes to a listed district, or for purposes of the state credit, is eligible for individual listing, is obtained only by submitting Part 1 of the tax credit application.
How much money do I have to spend?
Under the federal program, the project must be a “substantial rehabilitation” to qualify the Investor for the credit. The Internal Revenue Service defines “substantial” as exceeding the owner’s adjusted basis in the building or $5,000, whichever is greater.
The adjusted basis is generally defined as the purchase price, minus the value of the land, minus any depreciation already claimed, plus the value of any earlier capital improvements.
The threshold requirements for the state program are different from the federal requirements. In order to qualify for the state credit, the rehabilitation expenses must be:
- For owner-occupied structures, at least 25% of the assessed value of the buildings for local real estate tax purposes for the year before the rehabilitation work began.
- For all other eligible structures, at least 50% of the assessed value of the buildings for local real estate tax purposes for the year before rehabilitation work began.
How long do I have to complete the rehabilitation?
The rehabilitation does not have to be completed within any particular period of time. However, the “substantial rehabilitation” test (for the federal program) and the “material rehabilitation test (for the state program) must be met within a consecutive 24-month period that ends sometime during the year in which the credits are claimed. Essentially, this means that for most projects the greatest expenditures must be made within a 2-year period. For phased projects, the time limit is extended to 60 months.
When can I claim the credit?
The credit is claimed in the year the rehabilitation is completed. If you cannot use up the full amount of the credit in the first year, it can be carried forward. The federal credit may be carried forward for up to 20 years, and back for one year. The state credit may be carried forward for up to 10 years. There is no carry back for the state credit.
Can I sell the building after I complete the rehabilitation?
Under the federal program, if the building is disposed of, or if it loses its income producing status, within five years after the rehabilitation is completed, the taxpayer will face recapture of the credit. The amount of recapture is reduced by 20% in each succeeding year after the year the rehabilitation is completed— in other words, if the building is sold after one year, there will be recapture of 80% of the credit, if it is sold after two years, there will be recapture of 60% of the credit, and so forth.
How do I apply for the credit?
Applying for the credit is a three-part process. Part 1 requests certification that the building is historic— i.e. eligible for the program. For properties that are individually listed, Part 1 is not necessary. For all other properties— i.e. those seeking certification that they are contributing structures in a listed historic district of individually eligible for listing— a Part 1 is required. Photographs showing the property in its pre-rehabilitation state must be submitted with Part 1.
Part 2 requests certification that the proposed rehabilitation work appears to be consistent with the Secretary’s Standards. Part 2 is the most complex part of the application. It requires a description of each signification architectural feature of the property and how it will be treated in the rehabilitation. Many property owners choose to complete Part 2 themselves using the department’s Sample Rehabilitation Proposal as a guide. Others hire a professional consultant to assist them. A list of consultants is available from the department upon request. Additional photographs of the property are sometimes necessary to document Part 2.
Part 3 requests certification that the complete work is consistent with the Secretary’s Standards. Photographs showing the completed work must accompany Part 3. For the state credit, if the eligible expenses exceed $100,000, a CPA certification is also required.
