dcsimg

Old House Newbies: Federal Tax Breaks for Old Houses

By: JoVon Sotak , Contributing Writer
In: Old Houses

The great thing about the first time home buyer’s tax credit from last year is that it gave folks incentive to buy homes, especially older homes. I was one of those folks. However, due to all sorts of unanticipated delays, I backed out of the sale, thus losing the potential credit.

Why do I bring this up this week in November when most people wait until April? This year, I filed an extension because of the pending sale. And because all the dates for the house and tax credit were by the 30th of the month, somehow I got it in my head that the extension gave me until October 30 to file my taxes. I bet you can guess how upset I was on October 28 when I sat down at the not-quite 11th hour to finish them.

I learned something today. Well, it’s more like remembering what I’ve learned every year for the past five years: single people without children or student loan debt or a mortgage get the short shrift at tax time. So, before the 2010 tax season rolls around, I’m looking at not-recovered housing market and examining my options: old house or newer house?

One of the pieces I didn’t investigate before I entered into a purchase agreement for my grandmother’s house that was built in 1905 was the potential tax benefits of owning an old or historic home. So, this, old house newbies, is a crash introductory course on what I’ve learned that might benefit you and help you make your own decision when it comes to purchasing and renovating an historic or old house.

First, there are federal tax incentives and state tax incentives for historic properties. Having an old house, if it isn’t historic, doesn’t count for much.  This post will focus on federal tax incentives and next week’s post will look at state tax stuff.

What defines historic? For the purposes of the federal rehabilitation tax credit, a building has to be a “certified historic structure.” That means it has to be located in an official historic district and certified by the Secretary of the Interior as being historically significant to that district or listed in the National Register of Historic Places. The good news is that there are 13,594 historic districts, so you might find one near you to help narrow down your choices of homes to buy (see this article about how homes in historic districts are a good value). If the house you’re looking at isn’t currently on the register and you think it could qualify, that’s a whole different ball of wax that I’ll have to explore in another post.

This federal tax credit of 20 percent is for rehabilitation work, though, it’s typically used for commercial properties that generate income.  The work also must be “certified rehabilitation,” which means it needs to be approved by the Secretary of the Interior and meet criteria that preserve the historic character of the building. **change: There is also a non-historic federal tax credit of 10 percent. **

There’s also a preservation easement tax break from the federal government that can equal up to 30 percent of your adjusted gross income, depending on the property’s value. However, a historic trust or nonprofit gets to control your home and holds the easement. That means any improvements you want to make have to be approved by that group.

***UPDATE***

Thanks for all your feedback and info! Megan is definitely right about the rehabilitation tax credit. You can get a 10 percent non-historic credit if the building was built before 1936.

Here’s a list of handy IRS resources to help:

Share/Save/Bookmark

Post a Comment

Enter the text shown above

  1. 6 Responses  to “Old House Newbies: Federal Tax Breaks for Old Houses”

  2. Aug 29, 2011
    Great point, Linda. When it's a rehab credit, you're spending money to save money. But if the project has to be done anyway, you might as well figure these sorts of incentives into your pros-cons list.
  3. Linda
    Aug 29, 2011
    Another thing to keep in mind is that the rehab tax credit is 20% of the amount that is spent in a certified rehab or certified historic structure. This is a significant amount when spending thousands whether a first-time buyer or currently a historical home owner.
  4. Aug 29, 2011
    @Megan--Thanks! I'll be rounding up some info this week on state tax breaks. I was surprised by how many state's offer them. However, with states examining their budgets, some of those benefits are on the chopping block. @Mike--thanks for including that link and additional info on the easement tax credit!
  5. Mike
    Aug 29, 2011
    Concerning tax breaks for historic easements, the IRS has been saying for a few years that if you live in a district with historic regulations, you can't get the tax break. You can't give away control over your property because the historic regulations already did that. 'Another problem arises in connection with historic easements, particularly façade easements. Here again, some taxpayers are taking improperly large deductions. They agree not to modify the façade of their historic house and they give an easement to this effect to a charity. However, if the façade was already subject to restrictions under local zoning ordinances, the taxpayers may, in fact, be giving up nothing, or very little. A taxpayer cannot give up a right that he or she does not have.' http://www.irs.gov/charities/article/0,,id=137244,00.html
  6. Aug 29, 2011
    Many states offer a higher tax credit rate than the federal 20% one for historic properties. So, you can end up benefiting twice as much if you get a 40% state tax credit plus a 20% federal tax credit. Anyone who is interested should definitely consider talking to their local SHPO (State Historic Preservation Office) about listing their home on the National Register if it isn't already. There are usually consultants in the area who prepare National Register nominations and tax credit applications for property owners. I think even if your historic property (as long as it was constructed prior to 1936) isn't a "certified historic structure" you can still get a 10% federal tax credit. Preservation easements are a great tool for those who, say, have a large amount of land with a historic property or a historic landscape that they want to preserve for future generations. It cuts the property taxes way way down, restricts development of land and makes sure any changes to the historic building are compliant with standard preservation principles.
  7. Frank
    Aug 29, 2011
    Good information, but don't let the tail wag the dog. Tax breaks and incentives are great, but I would not get involved with a historic remodel strictly to save some tax dollars..