Restoration tax break
You can still get a tax break by restoring an old house. Despite massive federal government cutbacks in grants and other aids for historic preservation, one program is still in force for the old-house buff. The Economic Recovery Tax Act of 1981 allows income-tax savings for rehabilitation of certified historic structures or of nonhistoric buildings that are at least 30 years old.
A building is certified historic if it is listed individually on the National Register of Historic Places or if it is a significant structure located in a National Register district or a local- or state-designated district.
If the project is located in a local or state district, the district must be certified by the secretary of the interior.
The certified building must be income-producing in order to qualify for the tax break.
It must, for example, be used for industrial, commercial, or rental-residental purposes. The tax savings do not apply to residential properties.
Further, the building must meet the substantial-rehabilitation test. The cost of the restoration during a 24-month period must exceed either $5,000 or the adjusted cost basis of the property, whichever is greater.
The adjusted cost basis of a building equals the owner's initial cost of the building, plus the cost of improvements, less the amount taken in depreciation. If a structure was purchased five years ago for $50,000, say, and the buyer spent $10,000 on capital improvements in that time and had taken $5,000 in depreciation, then his adjusted cost basis would be $55,000 ($50,000 plus $10,000 minus $5,000).
Thus, the work planned on the structure would have to exceed $55,000 for the project to qualify for the tax savings.
All the plans for restoration and the actual work must be certified by the secretary of the interior as being consistent with the historic character of the property. The best way to do this is to get in touch with the state historic preservation office (SHPO), usually located in the capital city of the state. The SHPO will review the plans and specifications to ensure that they adhere to the secretary of the interior's standards and guidelines for rehabilitation.
A representative of the SHPO will also visit the project during the work and at the completion.
Once the project is completed and the proper forms approved, there are two kinds of tax savings one can take:
The investment tax credit (ITC), taken only once (in the year that the project is completed), is computed by taking 25 percent of the rehabilitation costs. This is then deducted directly from taxes owed to the federal government. If the rehabilitation costs were $60,000, then the ITC would be 25 percent of $60,000, or $15,000. As a result, $15,000 would be deducted from taxes owed.
The other tax saving, annual cost-recovery allowance, is taken over a 15-year period and is not deducted from taxes owed. The annual cost-recovery allowance is calculated by subtracting one-half of the ITC from the rehabilitation costs and then dividing that figure by 15 years.