1	TAX INCENTIVES For Historic Preservation within Harford County, Maryland Monique D. Glassman, BPR 101 Online, Summer 2004
2	Federal Historic Preservation Tax Incentive Program Created under the Tax Reform Act of 1976 Administered by the NPS in conjunction with the IRS and SHPO’s Created to boost the preservation efforts within the United States Currently offers an income tax credit equal to 20% of qualified rehabilitation expenditures
3	Four Factors to Meet the Eligibility Requirements Project must be a Certified Historic Structure Property must be used for income-producing activities The property must meet the Substantial Rehabilitation Test All rehabilitation work to be completed in accordance with the Secretary of the Interior’s Standards for Rehabilitation
4	Substantial Rehabilitation Test, What’s That??? The dollars spent on the rehabilitation must be over $5,000 or the adjusted basis of the building, whichever is greater Adjusted basis = cost + improvements – depreciation (all prior to commencement of rehabilitation work) The test must be met within two years, or five years for multiple phase projects
5	What is a Certified Historic Structure? Listed on the National Register of Historic Places as an individual property Listed on the National Register of Historic Places as part of a historic district
6	What are Income-Producing Activities? Any activity that uses a building to produce income For example, commercial (office buildings), industrial, or residential real estate properties Personal, single-family, owner-occupied residences would not qualify
7	Department of the Interior’s Standards for Rehabilitation The Standards are ten basic guidelines that are used to ensure that the historic character of the building is preserved They can be reviewed at the National Park Service’s website (www.cr.nps.gov)
8	How Do I Know I’m Eligible? There are many sources of information that can help you to determine if your project is eligible It is VERY important to contact your State Historic Preservation Office (SHPO) and the National Park Service with any questions that you might have.
9	How Does The Tax Credit Work? The tax credit is equal to 20% of the qualified rehabilitation expenditures incurred for the project Therefore, if you have $1,000,000 of qualified rehabilitation expenditures, your federal tax credit would be equal to $200,000. The tax credit is applied to any tax liability that you have on your tax return in the year the rehabilitation work was completed
10	How Does the Tax Credit Work (Continued)? In the preceding example, what happens if you do not owe $200,000 in taxes for the year the rehabilitation is completed? The tax credit is non-refundable at the federal level, meaning that any excess amounts will not be given in the form of an income tax refund The tax credit can be carried forward to future years, or applied to previous years, based upon the IRS’s rules and regulations.
11	That’s Great, But What Other Incentives Are Offered? Mirroring the federal program, many states and local governments offer tax credits For an example, we’ll look at the incentives offered in Harford County, MD This means that you can take federal income tax credits, MD income tax credits and Harford County property tax credits, all at the same time!!!
12	Maryland’s Heritage Preservation Tax Credit Program Established in 1996, mirroring the federal program Overseen by the Maryland Historical Trust Currently offers a 20% tax credit, based upon the qualified rehabilitation expenditures (exactly like the federal tax credit) The tax credits not used are refundable!! This means that you can claim a refund for any tax credits not used (which is particularly helpful if you owe little or no Maryland taxes from year to year)
13	Requirements for Taking the Maryland Income Tax Credit The property must be eligible Rehabilitation work must be performed in accordance with the Secretary of the Interior’s Standards for Rehabilitation The rehabilitation expenditures must meet the Substantial Rehabilitation Test (same as the federal test)
14	How Do I Know if My Property Is Eligible? If it’s listed on the National Register of Historic Places, it’s eligible If it is designated as a historic property under local laws (i.e. Harford County), it’s eligible If it’s located in a historic district (locally recognized or included in the National Register of Historic Places), it’s eligible If it’s included in a “certified heritage area” it’s eligible, as long as the property is certified as contributing to the historic character of the area
15	How is This Different From the Federally Eligible Properties? The requirements are much the same except that locally-recognized properties are eligible without being listed on the National Register of Historic Places The property does not need to be income-producing. Therefore, if your home is a historic property, you can apply for Maryland historic tax credits!!
16	Important Items to Note Regarding the Maryland Income Tax Credit The 2004 General Assembly session has limited the amount of funds available for credits Credits will now be granted on a competitive basis, based on applications that are submitted from 1/1 through 3/31 of each year Of the total tax credits allowable each year, no more than 50% can be awarded in any specific County, or in Baltimore City. Cap of $50,000 of credits allowed for rehabilitation of a single-family home Set aside of 10% for tax credits to be issued to non-profit organizations
17	Harford County Tax Incentives The tax incentive for Harford County rehabilitation comes in the form of a property tax credit The credit is equal to 10% of the rehabilitation expenditures The credit can be used by properties that are considered Harford County Landmarks.
18	Are There Any Other Incentives? YES!!!! Easements A portion of a historic building can be donated to a charitable organization, resulting in an income tax deduction You lose rights to the portion of the building donated This is a federal-level incentive because it’s included in your itemized deductions on your Federal Income Tax Return
19	What? Donate a Portion of My Building? Yes, one example of this is the façade of the building (the exterior portion) You can donate the façade, and give up all rights to change it to the Maryland Historical Trust In exchange, the Maryland Historical Trust ensures that the façade remains unchanged and that the historic character of the building is always preserved In return, you get an income tax deduction, which reduces the base on which your income tax liability is calculated
20	Example The following example will show what can happen when all four tax incentives (federal and state tax credits, local level property tax credit, and easements) are used together In this example we will assume that we own a historic property in Joppa, Maryland We purchased the property on July 1, 2004 for $200,000 We have applied for, and have been granted, National Register of Historic Places listing
21	Example - Assumptions The rehabilitation work started on July 2, 2004, right after purchase The property will be turned into four individual apartments (thus, determined to be an income-producing activity) and the owner does not occupy any of the apartments We (an individual developer) own the building 100%
22	Example (Cont’d) In this example, we have met the eligibility requirements for federal, state, and local purposes because the property is listed on the National Register of Historic Places In addition, the property is eligible because it’s an income-producing property All rehabilitation work will be completed in accordance with the Standards, as accepted by the NPS in our applications The last test that we need to meet in order to be eligible at all levels is the Substantial Rehabilitation Test
23	Example – More Assumptions On March 31, 2006 the rehabilitation of the project was completed At March 31, 2006, the total rehabilitation expenditures were $500,000 We have also decided to donate the exterior portion of the building to the Maryland Historical Trust, and it is determined that this donation can be claimed as a charitable donation
24	Example - Substantial Rehabilitation Test This test has been successfully met We have spent $500,000, which exceeds our adjusted basis prior to rehabilitation ($200,000) The $500,000 was spent within two years since the project is complete at March 31, 2006 (rehabilitation started on July 2, 2004, therefore, the test needed to be met by July 1, 2006)
25	Example – Benefits The rehabilitation tax credits and the charitable donation for the easement can be claimed on our 2006 tax return. Our federal tax credit is $100,000 ($500,000 x 20%) Our state tax credit is $100,000 Our credit for property taxes is equal to $50,000
26	Example – Benefits – More Assumptions Our federal and state taxable income for 2006 is equal to $100,000 There are no other itemized deductions being claimed on our 2006 tax return There are no other exemptions, other deductions, etc. claimed on our tax return, for simplicity purposes
27	Example – Calculation of Benefits 2006 Taxable Income - $100,000 Less: Charitable Donation (50,000)* Adjusted Taxable Income $50,000 Let’s assume that based upon $50,000 of income, the federal tax liability is $1,000 and that the Maryland state tax liability is $750 * Based upon an independent appraiser’s valuation of the exterior of the building
28	Example – Calculation of Benefits (Cont’d) Federal tax liability $1,000 Less: Tax credits received (100,000) 2006 Federal Taxes Owed (99,000) We, the taxpayer, would not owe any federal taxes in 2006, and although we cannot get a refund of $99,000, we can apply the $99,000 to future years
29	Example – Calculation of Benefits – (Cont’d) 2006 State Income Tax Liability $750 State Income Tax Credits (100,000) 2006 State Taxes Owed (99,250) In this case, the $99,250 can be claimed as a Maryland tax refund. Therefore, we, the taxpayer can request the state of Maryland to pay us $99,250, or carry this amount forward for up to 10 years
30	Example – Calculation of Benefits Explanation The easement has reduced our income to where we have a low tax liability to begin with Our federal tax liability has been reduced to zero, and we have amounts to carry forward to future years We can claim a Maryland state refund Property tax credits would not be reflected in this example because they would have been reflected in the 2006 taxable income amount before the charitable donation (the income amount would have been lower than normal due to the lower operating expense)
31	Things to Keep In Mind These items have been simplified in order to give a general understanding of the benefits that are available There are many details that go into these calculations which have been excluded for simplicity purposes There are many IRS regulations regarding tax credits that would also need to be followed
32	Tips for Success Make sure the SHPO and NPS are involved from the beginning. If rehabilitation work is not approved by them prior to beginning it, credits cannot be guaranteed. It is also important to consult your accountant/financial advisor before beginning a project like this, as they can help you throughout the process, determine your eligibility, certify the total rehabilitation expenditures, etc.