Tax Benefits of Owning a Historic Home

Various government programs offer financial incentives to encourage the preservation of historic properties. Federal, state, and local tax benefits are available to owners who undertake the work of rehabilitating and maintaining historic homes. These incentives aim to offset the costs associated with the proper care of these structures. These programs help ensure that the architectural and cultural heritage embodied in these buildings endures for future generations.

Defining a Qualifying Historic Structure

For a property to be eligible for federal tax incentives, it must be officially recognized as a “certified historic structure.” This designation is achieved in one of two ways. The first is for the property to be individually listed in the National Register of Historic Places, the official list of the nation’s historic places worthy of preservation. The National Register is maintained by the National Park Service (NPS).

Alternatively, a building can qualify if it is located within a registered historic district and certified by the NPS as contributing to the historic significance of that district. A registered historic district is a geographically defined area with a significant concentration of sites or buildings united by historical events or aesthetics. Within these districts, properties are classified as either “contributing” or “non-contributing.” A contributing property is one that aligns with the district’s historical and architectural identity, while a non-contributing property does not.

The Federal Historic Preservation Tax Credit

The primary federal incentive is the Historic Preservation Tax Credit, which provides a 20% income tax credit for the qualified rehabilitation of income-producing historic properties. This credit is not available for work done on a personal residence unless a portion of the home is used for business, such as a home office or rental unit. In that case, the credit would only apply to the expenses associated with the income-generating space. The credit is claimed over a five-year period.

To qualify for the 20% credit, the project must involve “Qualified Rehabilitation Expenditures” (QREs). These are costs directly related to the structural and systems-level repair and restoration of the building. Examples of QREs include work on walls, floors, and roofs; repairs to plumbing and electrical systems; and architectural or engineering fees. Costs that do not qualify include property acquisition, new construction or additions, landscaping, and site work like paving.

A requirement for claiming the credit is meeting the “substantial rehabilitation” test. This test ensures the investment in the property is significant. The IRS defines this by requiring that the QREs must exceed the “adjusted basis” of the building within a 24-month period. The adjusted basis is the purchase price of the building (excluding land value), plus the cost of any capital improvements, minus any depreciation taken.

The Application Process for the Federal Credit

Claiming the federal tax credit involves a formal, three-part application submitted to the National Park Service (NPS) for approval. This process is administered in partnership with the State Historic Preservation Office (SHPO) in the state where the property is located. The SHPO serves as the initial point of contact and review, providing recommendations to the NPS, which makes the final determination.

The first step is submitting Part 1 of the Historic Preservation Certification Application, the “Certification of Historic Significance.” This part confirms the property’s status as a certified historic structure. If the property is within a historic district, Part 1 is used to secure a determination that it is a contributing structure.

Next, the property owner must submit Part 2, the “Description of Rehabilitation,” which outlines the proposed scope of work. The SHPO and NPS review this plan to ensure it complies with the Secretary of the Interior’s Standards for Rehabilitation. Finally, upon completion of the project, the owner submits Part 3, the “Request for Certification of Completed Work,” for a final review to certify that the work was executed as proposed.

State and Local Tax Incentives

Beyond the federal program, many states and some local governments offer their own tax incentives to encourage historic preservation. A significant feature of many state-level programs is that they are available for owner-occupied residential properties, filling a gap left by the federal credit. These programs vary considerably, so owners must research the specific opportunities available to them.

The incentives can take several forms. Many states offer a state income tax credit for qualified rehabilitation expenses, which may operate as a standalone program. At the local level, incentives often focus on property taxes. A municipality might offer a property tax abatement or a tax freeze, where the assessed value is frozen for a set number of years to shield the owner from tax increases. Property owners should contact their SHPO for detailed information on available state and local programs.

Historic Preservation Easements

A different type of tax benefit is the historic preservation easement, which is a tax deduction for a charitable contribution. An easement is a legal agreement that a property owner makes with a qualified organization, such as a preservation society, to permanently protect the historic character of their property. By donating the easement, the owner gives up certain development rights, such as the right to alter the historic facade or demolish the building.

The value of this donation, and thus the amount of the income tax deduction, is determined by a qualified appraisal. The appraiser calculates the difference between the property’s fair market value with the development rights intact and its value after the restrictions of the easement are imposed. This is a complex transaction that permanently affects the property and requires professional guidance. The IRS has specific requirements for both the appraisal and the recipient organization.