Skip to main content

Publications

Oct 2003
01
October 01, 2003

Historic Tax Preservation

"Location, location, location." Many of our state's urban areas, including the cities of Grand Rapids, Muskegon, Battle Creek and Detroit, are enjoying a much-needed rejuvenation as old buildings are rehabilitated into efficient, popular new offices, homes, and retail centers. What is fueling the emerging trend for businesses and residents to return to the cities?

For many:  economics. If the historical integrity of a building undergoing renovation is preserved, federal and state preservation tax incentive programs can significantly reduce the cost of the project. For some, these programs make good business sense despite the administrative complexities.

While a tax incentive lowers the amount of income subject to taxation, a tax credit lowers the amount of tax owed. Thus, a credit basically permits a dollar-for-dollar reduction in the amount of income tax liability, such that if an owner receives a $100,000 tax credit, the owner's income tax liability is generally reduced by $100,000.

This article provides a brief overview of three tax credit programs available.

20% Federal Historic Preservation Credit. A 20% federal income tax credit is available for a historic rehabilitation project under the following conditions:

    • The use of the property must be depreciable. Accordingly, an owner that rehabilitates his or her own strictly personal residence does not qualify.

    • The project must be for a "certified historic structure," which is a building that is either individually listed in the National Register of Historic Places or located in a registered historic district and certified by the National Park Service as contributing to the historic significance of that district. A state or local historic district may also qualify. Michigan's State Historic Preservation Office maintains a database of all buildings in Michigan listed in the National Register of Historic Places and all certified state and local historic districts.

    • The building must qualify as a "certified rehabilitation" which requires that the rehabilitation maintain the historic character of the property and, if applicable, the district in which the building is located. While the federal program takes into account the need to create an efficient use of the property in today's market, considerable attention is given in the evaluation of whether the alterations damage, destroy or conceal features of the building that in the government's opinion contribute to the historic significance of the building. There are a host of published rehabilitation standards that must be followed. For example, an owner may be limited in the type of windows that can be installed.

    • Only qualified expenditures may be included in the tax credit. These include the costs for material, labor, architectural, engineering, surveying and legal fees and other construction-related reasonable fees that are added to the basis of the property.

    • The qualified expenditures must exceed the greater of $5,000 or the adjusted basis of the building and its structural components, as defined by the Internal Revenue Code.

    • All applicants must pay a processing fee ranging from $250 to $2,500.

    • The project cannot be disposed of within five years. Early disposition will require a repayment of all or a portion of the tax credit.

    • The applicant must make formal application, which may include the preparation of three lengthy parts, as well as work closely with Michigan's State Historic Preservation Office to organize various visits of inspectors to the site. The federal government is known to significantly participate in the selection of materials, review of the architectural rehabilitation, and inspection of the rehabilitation work. The tax credit is then claimed on a specially designated IRS form in the year that the rehabilitated building is placed in service except that if the project is phased, it may be claimed earlier than such date. Any surplus for the tax credit may be carried over to the next tax year.

The 10% Federal Rehabilitation Tax Credit. A 10% federal tax credit is available for a rehabilitation project if the following conditions are met:

  • The project must be a non-historic building. It cannot be listed in the National Register of Historic Places and if it is located in a certified historic district, it cannot be deemed to contribute to the historic significance of the historic district.

  • The building must be built before 1936 and used for nonresidential purposes.

  • Like the 20% tax credit, the rehabilitation credit must be substantial and depreciable.

  • The rehabilitation project cannot disturb certain threshold percentages of the building's walls and internal structural framework.

  • The project cannot qualify for the 20% tax credit.

  • Unlike the 20% tax credit, there is no formal review process to evaluate the rehabilitation work. The credit is claimed on a specially designated tax form.

Michigan's State Historic Preservation Credit. Michigan grants a 25% tax credit against the state's general income tax or single business tax upon the following conditions:

  • The project must be located in the state of Michigan.

  • If the project is located in a jurisdiction with a population of 5,000 people or more, it must be in and contribute to the significance of the local historic district. If the project is located in a jurisdiction with a population of less than 5,000 people, alternatively the building may be listed in the State Register of Historic Sites or the National Register of Historic Places.

  • The state tax credit requires compliance with substantially the same requirements of the federal government's 20% federal tax credit except that residential projects qualify.

  • If the project qualifies for the 20% federal tax credit, the applicant will only be entitled to receive the state tax credit if the applicant receives the federal tax credit and then the credit shall be reduced by the amount received under such credit, meaning the applicant will be entitled to receive no more than a 5% credit. This means that only residential rehabilitation projects are eligible to receive the full 25% state tax credit.

  • Qualified rehabilitation expenditures must generally be equal to or greater than 10% of the state equalized value of the property and be completed within five years.

* * *

Melissa N. Collar is a partner with Warner Norcross & Judd LLP who focuses her practice in real estate, construction, condominium and closely held businesses law. Melissa may be reached in the Grand Rapids office at 616.752.2209. Warner Norcross & Judd is a full-service law firm with offices in Grand Rapids, Metro Detroit, Holland and Muskegon. Because each business situation is different, this information is intended for general information purposes only and is not intended to provide legal advice.

 

West Michigan Commercial Development & Real Estate Quarterly

NOTICE. Although we would like to hear from you, we cannot represent you until we know that doing so will not create a conflict of interest. Also, we cannot treat unsolicited information as confidential. Accordingly, please do not send us any information about any matter that may involve you until you receive a written statement from us that we represent you.

By clicking the ‘ACCEPT’ button, you agree that we may review any information you transmit to us. You recognize that our review of your information, even if you submitted it in a good faith effort to retain us, and even if you consider it confidential, does not preclude us from representing another client directly adverse to you, even in a matter where that information could and will be used against you.

Please click the ‘ACCEPT’ button if you understand and accept the foregoing statement and wish to proceed.

ACCEPTCANCEL

Text

+ -

Reset