Tax Savings for Owners
of Income-Producing Historic Buildings
In South Carolina, owners of historic buildings
that produce income –- such as offices, retail stores, and rental housing --- may qualify for federal and state income tax credits.
Federal and State Historic Rehabilitation Tax Credits
- 20% Federal Historic Rehabilitation Tax Credit: Owners and some lessees of historic buildings used to produce income may be eligible for a federal income tax credit equal to 20% of their rehabilitation costs under the Tax Reform Act of 1986.
- 10% State Historic Rehabilitation Tax Credit: In South Carolina, taxpayers who qualify for the 20% federal income tax credit may also qualify for a state income tax credit of 10% of their rehabilitation costs under the South Carolina Historic Rehabilitation Incentives Act. (Section 12-6-3535)
The federal and state tax credits reduce the amount of income taxes owed. In general, a dollar of tax credit earned reduces the amount of income taxes owed by one dollar. Each tax situation is different, however, and we advise you to check with a tax specialist to determine how the credits would affect your tax liability.
Example
An owner who meets the requirements of the federal and state tax credit programs and spends $75,000 on rehabilitating his historic building can earn:
20% of $75,000 in rehabilitation expenses
= $15,000 federal income tax credit
10% of $75,000 in rehabilitation expenses
= $ 7,500 state income tax credit
Total credits = $22,500
In this example, the taxpayer will be able to subtract $15,000 from his federal income taxes and $7,500 from his state income taxes.
What buildings qualify for the federal and state credits?
- Your building must be:
- After rehabilitation, you must own the building and use it to produce income for 5 years. Income-producing buildings are those used in a trade or business or held for the production of income.
A building in a National Register-listed historic district
can be eligible for the tax credits if it contributes
to the district’s historic character and if it retains its basic historic appearance.
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How much money must I spend to qualify?
The costs of the rehabilitation work must be "substantial." This means your rehabilitation costs during a 24-month period must be more than $5,000 and greater than the adjusted basis of the building. The adjusted basis of the building is usually the purchase price, minus the cost of the land, plus the value of improvements already made, minus depreciation already taken.
Examples of calculating the adjusted basis of a building
.....for a building that was recently purchased
$ 100,000 (purchase price)
- 20,000 (value of land)
----------------
$ 80,000 (adjusted basis)
In this example, to be "substantial" the rehabilitation expenses would have to exceed $80,000.
.....for a building that has been owned for a long time
$ 80,000 (purchase price)
- 20,000 (value of land)
+20,000 (capital improvements)
- 40,000 (depreciation)
--------------
$ 40,000 (adjusted basis)
In this example, to be "substantial" the rehabilitation expenses would have to exceed $40,000.
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What rehabilitation work qualifies for the credits?
- Qualified rehabilitation expenditures include costs associated with:
- exterior and interior work undertaken on the historic building,
- architectural and engineering fees, site survey fees, legal expenses, development fees, and other construction-related costs, if they are added to the basis.
Qualified rehabilitation expenditures do not include acquisition costs, furnishings, new additions that expand the volume of the existing building, new building construction, and parking lots, sidewalks, and landscaping.
- The National Park Service must review and certify that all work meets the Secretary of the Interior’s Standards for Rehabilitation. The Secretary of the Interior’s Standards ensure that the rehabilitation respects the historic character of the building while allowing for reasonable changes to meet the needs of the project. Owners complete a three-part application to request approval from the National Park Service.
The application review process begins with the State Historic Preservation Office (SHPO) at the South Carolina Department of Archives and History. The SHPO assists owners by providing advice and literature on appropriate rehabilitation treatments to help them plan successful projects and complete their applications. The SHPO also reviews applications and makes recommendations to the National Park Service concerning whether projects meet the Secretary of the Interior’s Standards. After the SHPO review is completed, applications are forwarded to the Park Service, which makes the final decisions. To make sure that your project qualifies for the tax credits submit your application and talk with the SHPO staff before you begin work.
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When can I claim the credits?
You can claim the federal credit on Internal Revenue Service (IRS) form 3468 for the tax year in which the rehabilitated building is placed in service (that is, returned to use). There are also provisions for claiming the credit for phased projects.
The state credit must be claimed in equal installments over a 5-year period, beginning with the year in which the property is placed in service. If the tax credit installment exceeds your tax liability for any of these 5 years, you may carry the credit installment forward for up to 5 more years. You will claim the credit by submitting South Carolina Department of Revenue (DOR) form SC SCH. TC-21 with a copy of your federal income tax return showing the credit claimed.
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How do I get started?
1. Determine if your building is listed in the National Register of Historic Places. Our website includes a list of South Carolina properties listed in the National Register and maps showing the boundaries of National Register historic districts.
2. Visit the National Park Service website at http://www.nps.gov/history/hps/tps/tax/hpcappl.htm or call 803-896-6178 for more detailed information about the tax credits for income-producing buildings. This web page is a summary and does not address every aspect of the tax programs.
3. Obtain the application packet on-line from the National Park Service or contact the State Historic Preservation Office (jackson@scdah.state.sc.us or 803-896-6178) to request an application packet through the mail.
The three-part application includes:
Part 1: If your building is listed individually in the National Register and the listing includes only one building, you do not need to fill out a Part 1---Evaluation of Significance. If your building is located within a National Register-listed historic district or an individual listing with more than one building, you will need to complete a Part 1.
Part 2: All applicants must describe the rehabilitation by completing Part 2 of the application---Description of Rehabilitation. The application must include photographs of the building before rehabilitation.
Send the forms and accompanying materials to the State Historic Preservation Office in duplicate for review and comment. The SHPO will forward its comments and one copy of the application and related materials to the National Park Service.
Part 3: After your building is rehabilitated, take photographs of the completed work for Part 3 of the application-Request for Certification of Completed Work to the SHPO. Before the National Park Service can issue a final certification, the SHPO and Park Service must verify that the work corresponds to your Part 2 proposal.
4. Consult with an attorney or tax specialist to advise you on the tax aspects of the programs and to help you determine the effect of the credits on your tax liability. While the goal of the programs is to preserve historic buildings, they are also income tax programs and must meet Internal Revenue Service (IRS) and South Carolina Department of Revenue (DOR) requirements. The Internal Revenue Service (IRS) website includes Rehabilitation Tax Credit - Real Estate Tax Tips.
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Other Tax Incentives for Owners of Income-Producing Buildings
Property Tax Incentives for Rehabilitation Projects: Some local governments in South Carolina have implemented ordinances providing special property tax assessments to encourage the rehabilitation of historic buildings within their jurisdiction. These ordinances allow the local government to place a temporary ceiling on the assessed value of a historic building that has been substantially rehabilitated according to the Secretary of the Interior’s Standards for Rehabilitation. The state enabling legislation for this program (Sections 4-9-195 and 5-21-140, SC Code of Laws, 1976, as amended) is often referred to as the "Bailey Bill." Check with your local government to determine if it has passed an ordinance.
Federal Tax Incentives for Easement Donations: The federal government provides financial incentives to encourage the donation of easements protecting historic buildings and landscapes under the Tax Reform Act of 1986. Owners who donate easements meeting certain criteria to charitable or governmental organizations can claim a charitable deduction on their federal income taxes. When owners donate conservation or preservation easements for historic properties, they pledge to preserve specified historic features and agree to obtain the easement holder’s consent before making alterations. More information about the tax advantages is available on the National Park Service website. You can also find information on the State Historic Preservation Office Conservation Easements webpage. If you plan to use the 20% Federal Historic Rehabilitation Tax Credit in combination with an easement donation, consult your tax advisor because the easement donation may impact the rehabilitation credit.
Federal Tax Credit for Low Income Housing: The Tax Reform Act of 1986 also created an income tax credit for acquisition, construction, or rehabilitation of low income housing. Many developers have used the Low Income Housing Tax Credit in conjunction with the 20% Federal Historic Rehabilitation Tax Credit to rehabilitate historic buildings to provide rental units for low to moderate income residents. For more information, contact the State Housing Finance and Development Authority (803-734-2000 or www.sha.state.sc.us), which allocates the Low Income Housing Credits in South Carolina.
10% Federal Rehabilitation Tax Credit: This credit, created by the Tax Reform Act of 1986, is available for the rehabilitation of non-historic buildings. Non-historic buildings are defined as buildings constructed before 1936 that are not listed in the National Register. For a building located within the boundaries of a National Register historic district, the National Park Service must certify that it does not contribute to the district. The 10% credit applies only to buildings rehabilitated for non-residential uses. No State Historic Preservation Office or National Park Service review is required for these projects. More information about the 10% federal credit is available on the National Park Service website. The website of the Internal Revenue Service also includes information about the 10% credit.
Tax Incentives for Rehabilitating Textile Mill Buildings: The South Carolina Textiles Communities Revitalization Act (Section 6-32-10, SC Code of Laws, 1976, as amended) was approved by the General Assembly and signed by Governor Sanford in May 2004. The law provides tax incentives to encourage the renovation and redevelopment of abandoned textile mill sites. A taxpayer who meets the requirements of the law and improves, renovates, or redevelops an abandoned textile mill building is eligible for one of two tax credits: a credit against local property taxes or a state income tax credit.
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