What Is a Historical Structure and How Does It Impact Finances?

Preserving historical structures is about more than maintaining cultural heritage—it has financial implications. Owners, investors, and developers must understand how these buildings affect costs, taxes, and financing. Governments offer incentives to encourage preservation, but ownership also brings additional expenses and regulations.

Financial considerations include tax benefits, depreciation rules, insurance costs, and restrictions on modifications, all of which impact the long-term value and profitability of historic properties.

Revised Financial Reporting Standards

Accounting for historical structures follows different financial reporting standards than conventional real estate. These properties often fall under specialized frameworks due to unique valuation challenges, impairment considerations, and regulatory constraints. The Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) provide guidance, particularly for nonprofit organizations and government-owned properties.

Determining fair value is complex. Unlike standard commercial properties, historic buildings often have modification restrictions, limiting marketability and affecting valuation. Under Generally Accepted Accounting Principles (GAAP), entities must assess whether a historic asset’s carrying value exceeds its recoverable amount. If impairment is identified, adjustments must be recorded, impacting financial statements and borrowing capacity.

Organizations receiving grants or public funding for preservation must account for donor-imposed restrictions. Nonprofits following FASB ASC 958 classify contributions as with or without donor restrictions, affecting fund usage and reporting. Government-owned properties must comply with GASB Statement No. 34, which requires detailed disclosures on capital assets, including condition assessments and maintenance expenditures.

Updated Depreciation Rules

Depreciation rules for historical structures differ from standard real estate due to tax law classifications. The Internal Revenue Service (IRS) does not allow straight-line depreciation for historic buildings with preservation restrictions. Instead, owners must use the Modified Accelerated Cost Recovery System (MACRS) or provisions under Section 168 of the Internal Revenue Code. The recovery period for commercial historic buildings is typically 39 years, while residential rental properties follow a 27.5-year schedule.

Rehabilitation projects complicate depreciation calculations. Improvement costs may need to be capitalized rather than expensed immediately, depending on whether modifications extend the building’s useful life or adapt it for a new purpose. If a structure is placed in service after substantial rehabilitation, the adjusted basis must reflect these costs, and depreciation resets accordingly. Routine maintenance or minor repairs do not affect the depreciation schedule and can often be deducted in the year incurred.

Owners must also consider recapture rules when selling or repurposing a historic property. If a building has been depreciated and later sold at a gain, a portion of that gain may be subject to recapture under Section 1250, which taxes previously claimed depreciation at a maximum rate of 25%. This differs from capital gains tax rates, which range from 0% to 20% depending on income. Understanding how depreciation affects future tax liabilities is essential for long-term financial planning.

Current Tax Credits

Tax credits help offset the costs of preserving historical structures, particularly for rehabilitation projects. The Federal Historic Rehabilitation Tax Credit (HTC) offers a 20% credit on qualified rehabilitation expenditures (QREs) for income-producing properties listed in the National Register of Historic Places or certified as contributing to a historic district. Renovations must meet the Secretary of the Interior’s Standards for Rehabilitation to qualify.

Many states offer additional incentives. Virginia provides a 25% state credit, while Louisiana offers up to 25% for commercial properties and 18% for owner-occupied residences. These credits are typically non-refundable but can be carried forward to offset future tax liabilities. Some states allow the transfer or sale of unused credits, providing liquidity for developers who may not have sufficient tax liability to benefit fully.

Beyond rehabilitation credits, the Opportunity Zone program offers tax advantages for historic properties in designated economically distressed areas. Investors who reinvest capital gains into a Qualified Opportunity Fund (QOF) that finances historic preservation may be eligible for deferrals or reductions in capital gains tax, with potential exclusions for long-term holdings exceeding ten years. This can make historic redevelopment projects more financially attractive.

Insurance Requirements

Insuring a historical structure presents challenges due to higher restoration costs, specialized materials, and stricter building codes. Standard commercial property insurance often fails to cover full replacement value, necessitating specialized policies such as historic property insurance or guaranteed replacement cost coverage. Insurers assess risk based on structural integrity, fire resistance, and compliance with preservation ordinances, leading to higher premiums than conventional properties.

Many historical structures require ordinance or law coverage, which protects against increased costs of rebuilding to meet updated safety codes. If a building suffers partial damage, local regulations may mandate full compliance with modern standards, driving up repair expenses. Without this coverage, owners may be responsible for the difference between insurance payouts and actual reconstruction costs. Business interruption insurance is also important for income-generating historic properties, as restoration timelines tend to be longer due to the scarcity of period-appropriate materials and skilled craftsmen.

Financing Structures

Securing financing for historical structures differs from conventional real estate due to regulatory restrictions and preservation costs. Lenders assess these properties with heightened scrutiny, considering structural condition, compliance with preservation laws, and potential restoration needs. Traditional mortgage products may not always be available, leading borrowers to seek alternative financing options.

Historic preservation loans, offered by certain banks and government programs, support rehabilitation efforts. The Federal Housing Administration (FHA) provides Section 203(k) loans, allowing buyers to finance both the purchase and renovation of a historic property in a single mortgage. Some state and local governments offer low-interest loans or grants to assist with restoration costs, particularly for properties contributing to community revitalization. Private lenders specializing in historic real estate may also provide bridge loans or construction financing to cover upfront rehabilitation expenses before securing permanent financing.

For commercial projects, developers often turn to tax-exempt bonds or public-private partnerships (PPPs) to fund large-scale restorations. Tax increment financing (TIF) allows municipalities to use future property tax revenue increases to subsidize redevelopment costs. In cases where a historic building is repurposed for mixed-use development, lenders may structure financing through a combination of traditional debt, historic tax credit equity, and mezzanine financing to mitigate risk and enhance project feasibility.

Sale and Transfer Requirements

Selling or transferring ownership of a historical structure involves legal and financial considerations beyond standard real estate transactions. Many historic properties are subject to preservation easements, legally binding agreements that restrict alterations to the building’s exterior or interior features. These easements, often held by nonprofit preservation organizations or government agencies, remain in place after a sale, limiting modifications.

Buyers must conduct thorough due diligence to understand the financial implications of acquiring a historic building. Title searches should include a review of recorded preservation covenants, zoning restrictions, or outstanding compliance issues that could affect future use. Some municipalities impose right-of-first-refusal clauses, requiring owners to offer the property to a preservation entity before selling it on the open market. These restrictions can influence marketability and pricing.

Transferring ownership may also trigger tax consequences, particularly if the seller has previously claimed historic tax credits or depreciation deductions. If the building was used for commercial purposes, recapture provisions under the Internal Revenue Code may require repayment of a portion of previously claimed credits if the sale occurs within five years of completing rehabilitation work. Structuring the transaction through installment sales, like-kind exchanges under Section 1031, or charitable donations to preservation organizations can help mitigate tax liabilities while ensuring the property remains protected.