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By Sam A. Moak


The information in this column is not intended as legal advice but to provide a general understanding of the law.  Any readers with a legal problem, including those whose questions are addressed here, should consult an attorney for advice on their particular circumstance.

For over 30 years, the federal government has been using tax incentives to help preserve historic buildings.  Originally, federal law allowed accelerated depreciation on rehabilitated buildings, but subsequent changes have made preservation and revitalization efforts even more attractive to taxpayers.

Today, there is a general business credit equal to 20% of qualified rehabilitation expenses for a certified historic structure, or a 10% tax credit for the qualified rehabilitation of nonhistoric, nonresidential buildings first placed into service before 1936.  Eligibility for the tax incentives is determined by the National Park Service.  Tax credits are often more beneficial to taxpayers than deductions are, since every dollar of a tax credit reduces the amount of income tax owed by one dollar.

The 20% credit for the rehabilitation of a certified historic structure applies to commercial, industrial, agricultural, rental, or residential properties, but not to properties used exclusively as the owner’s private residence.  A certified historic structure must be a building as opposed to another type of structure.  To have the required historic status, the building must be either listed individually in the National Register of Historic Places or located in a registered historic district and certified as being of historic significance to the district.

Eligibility for the 20% credit also depends on meeting some additional requirements.  For example, the building must be depreciable, that is, used in a trade or business or held to produce income.  The rehabilitation must be substantial, generally defined as entailing expenditures exceeding the adjusted basis of the building and its structural components. Generally, this requirement must be met within two years or within five years for a project completed in multiple phases.

Qualified rehabilitation expenses include such items as architectural and engineering fees, site survey and development fees, legal expenses, and other construction-related costs, so long as they are added to the basis of the property, are reasonable, and are related to services performed.

The owner of the rehabilitated building must hold it for five years after completion of the rehabilitation or else pay back all or part of the 20% credit.  A sale in the first year means that the entire credit is recaptured.  The recapture amount is reduced by 20% per year for properties held between one and five years.

The 10% credit for nonhistoric buildings constructed before 1936 shares some of the requirements with the 20% credit, such as that the rehabilitation be substantial and the property be depreciable.  However, only buildings rehabilitated for nonresidential uses qualify for the 10% credit.  In addition, so that the identity of the original building is not lost in the process, projects undertaken for the 10% credit must meet specific tests based on retention of minimum percentages of the building’s walls and internal structural framework.

If you have a historic or old building in need of rehabilitation, it would be worth your time to look into these tax credits further to see if your project qualifies.

Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C. He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas.