Why Buy Historic Real Estate? Let’s Talk Tax Breaks

Got your sights set on an actual historic home or building?

Many people become enchanted with the charm and appeal of historical properties simply because it is old, unique, and irreplaceable. However, are you aware that many states, counties, and city governments offer tax breaks for owning and restoring a historical home or building?

You absolutely must know if any of these benefits are available in your area and if you qualify for them. If you are thinking of buying a historic home or building, these benefits could help you choose between two different properties in the same geographical location you are considering buying. In the end, they may pay for a substantial chunk of your rehabilitation and restoration costs.

There’s That Word ‘Historic’ Again

One way or another—whether local, state, or federal—tax breaks require a building possess special historic or architectural value. This can be as a standalone structure or come from being part of a larger historic district.

At the federal level, a building must be at least 50 years of age to be considered historic. There can be exceptions, but this 50-year rule-of-thumb works for historic building acknowledgment at the state and local levels too.

Places to look to see whether a building is considered historic or not include the National Register of Historic Places, which provides information on individual places and historic districts across the U.S., and your State Historic Preservation Office.

Local historic preservation organizations (historical societies, etc.) are also great resources while something as easy as checking your County Auditor’s website may list the age of a building and can be a good place to start.

You can also check your city’s website to see what it says about historic conservation or preservation. Why not just give them a call?

If the historical building you are thinking of buying is listed on the National Register of Historic Places, make sure to get a copy of this documentation for your records. The National Park Service administers the National Register database and they have most records digitized. If not, you can get a copy by simply emailing the request. More information is available here.

Federal Tax Credit Basics

The Federal Historic Rehabilitation Investment Tax Credit provides an incentive to renovate and restore historic buildings.  It provides a tax credit that is 20% of the taxpayer’s qualifying costs for rehabilitating a building (not for money spent on buying the building).

One eligibility requirement immediately stands out:

The building must be used for income-producing purposes—so, sorry, your private residence won’t qualify. The building also cannot be tax-exempt. Acceptable building uses include office, retail, light manufacturing, residential rental, and B&Bs.

Here are some additional things that building owners should know:

  1. The building must be listed on the National Register of Historic Places, either individually or as a contributing building within a historic district
  2. Rehab work must be done according to the Secretary of the Interior’s Standards for Rehabilitation
  3. The rehab cost must exceed the pre-rehabilitation cost of the building (a/k/a “the substantial rehabilitation test”). Generally, this requirement must be met within two years
  4. The 20% credit is spread over five years after rehabilitation
  5. After rehabilitation, the building must be owned by the same owner and operated as an income-producing property for five years

The National Park Service and the Internal Revenue Service administer this program in partnership with State Historic Preservation Offices. Check with your State Historic Preservation Office for more information on requirements and how to apply. Click here for a list of all the state historic preservation offices.

Here are links to the State Historic Preservation Offices for our real estate service area: Ohio and Kentucky.

State-Run Historic Preservation Tax Credit Programs

Did you know that 37 states have a program that offers tax credits for the appropriate rehabilitation of historic buildings? They do!

Historic tax credits encourage private investment in the reuse of historic buildings. The resulting benefits (job creation comes to mind) to local economies and community revitalization is priceless. The existence of a state historic tax credit also ups the amount of federal investment in rehabilitation—statewide tax credit programs are often used in conjunction with the Federal Historic Tax Credit. Funny how that happens, huh?

The Ohio Historic Preservation Tax Credit is administered by the Ohio Development Services Agency in partnership with the State Historic Preservation Office (Ohio History Connection) and the Ohio Department of Taxation. Historic building owners can receive a state tax credit up to 25% of the qualified rehabilitation expenditures for the rehabilitation of their buildings.

Like the Feds, the Ohio tax credit can only be used for income-producing properties—no single family residences or condominiums. Eligible properties include multi-family rental housing, commercial, office, retail, industrial, or institutional properties. Unlike the Feds, there is no minimum rehabilitation amount. Work does need to be done according to the Secretary of the Interior’s Standards for Rehabilitation though. Tip: there are two application rounds per year and it’s pretty competitive! Click here for more info.

The Kentucky tax credit program is modeled on the federal program. Kentucky will credit up to 20% of qualified rehabilitation costs for income-producing properties. An added perk? The program offers up to 30% credit for qualified rehab expenses for owner-occupied residential properties. The Kentucky State Historic Preservation Office (Kentucky Heritage Council) has more information about the program here.

Programs between states vary but they all have a common requirement that the building must have a historic designation or certification. To check out what your state offers, click here for that list of all the state historic preservation offices again.

 The Local Level

More variety exists at the local level for historic tax breaks. Your city or county could offer a historic tax credit program—or not. They could also offer a tax abatement, which reduces your property tax, or even a partial tax exemption based on qualifying rehab work. Cincinnati does not offer a historic tax credit but rehabilitation work can eligible for a tax abatement. The Cincinnati Residential Tax Abatement program reduces property owners’ taxes by allowing them to pay taxes on the pre-improvement value of their property for 10-15 years.

One city that does offer a historic tax credit program is Baltimore, Maryland. Started in 1996, Baltimore’s tax credit program is one of the best in the country. It’s open to both residential and commercial buildings and offers a 10-year tax credit based on the increased property value. To date, the program has seen more than 5,000 projects.

Even if your city or county does not have a historic tax credit program, you’ll doubtless be in contact and coordinating with them if you score a federal and/or state credit. Where did think your building or zoning permit is coming from?

Also, if your building has a local designation or certification, chances are there will be an added review step (and paperwork!) for your rehabilitation project. Cincinnati requires a Certificate of Appropriateness (COA) if your property is a designated Local Landmark or located in a Local Historic District. Certificates are issued by Cincinnati’s Historic Conservation Office and are either part of your Building Permit or a separate document. It all depends on what you’re planning!

Ask for Help

If you need answers and guidance during your consideration of purchasing a historical home or building, it may be best to first seek guidance at the local level. There are more than likely multiple organizations in your area that are more than happy to help. Response time also tends to lengthen as you go up the chain too!

Cincinnati Historic Homes specializes in historic homes, apartment buildings, and commercial properties…

Why not use us as your “go-to” resource?