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.
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:
* listed individually in the National Register of Historic Places, or
located within a National Register-listed historic district and certified by the National Park Service as contributing to the significance of the district (by contributing to the district's historic character and retaining its historic appearance).
* 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.
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.
Example of calculating the adjusted basis.....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.
Example of calculating the adjusted basis.....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.
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.
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. The form is available on the DOR website.
How do I get started?
1. Determine if your building is listed in the National Register of Historic Places. View National Register nomination forms and photographs.
2. Visit the National Park Service Tax Incentives website at or call 803-896-6174 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. Review our Income Producing Tax Credits Application Packet webpage or contact the State Historic Preservation Office to request an application packet through the mail.
To complete your application, you will need:
Historic Preservation Certification Application and Instructions;
Photographs of the building(s) before any rehabilitation;
Map showing location of the building(s) if listed in a historic district; and
Plans of proposed rehabilitation work, including specifications for complex work.
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.
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 IRS website includes Rehabilitation Tax Credit - Real Estate Tax Tips which covers similar information to that found on the NPS/IRS page known as IRS Info.
This website does not provide legal, tax or accounting advice; the information provided is intended to be general in nature; and visitors to the website are strongly encouraged to consult their own professional tax, accounting and legal advisors on individual tax matters, or consult the SC Department of Revenue or the Internal Revenue Service (IRS). The SHPO is not responsible for the information or advice provided here as it may affect the specific tax consequences to any individual (including sole proprietor), corporate, partnership, estate or trust taxpayer, which will depend on many other facts and circumstances. The information is for the general benefit of persons interested in obtaining certifications from the SHPO that may allow them to qualify for federal and/or state historic income tax credits. Given the frequency of changes in federal and state tax laws, regulations and guidance, the information represents a good faith effort to reference controlling laws and regulations as accurately as possible.