Historic properties and historic districts are very popular and revered in many Wisconsin communities while others may look upon a historic property designation with a little bit of distrust, thinking that a historic property will be subject to tight restrictions and more costly to maintain. Part of the concern with expenses is often answered by a conversation about tax credits.
Wisconsin offers a 25 percent tax credit administered by the Wisconsin Historical Society and the Wisconsin Department of Revenue for rehabilitation of historic homes. Historic income-producing commercial properties, on the other hand, may be eligible for the 20 percent federal historic preservation tax credit and the 20 percent Wisconsin historic preservation tax credit. The federal program is administered by the U.S. Department of the Interior, acting through the National Park Service, and the U.S. Department of the Treasury, acting through the Internal Revenue Service, all in conjunction with the Wisconsin State Historical Society. Let’s dive in and learn more about these opportunities to enhance community pride through historic preservation.
1. Let’s be clear on the tax credit component
These historic property tax credits are not income tax deductions that lower the amount of income subject to taxation. These credits reduce the amount you owe for income taxes. The amount of the Wisconsin historic homes credit is 25 percent of the costs of eligible rehabilitation work. The federal historic rehabilitation credit is 20 percent of the amount spent for rehabilitation of a certified historic, income-producing structure. If a credit is larger than the amount that you owe in income taxes in one year, you can carry the unused balance forward into future tax years until the credit is used up.
2. How do I know if a house is “historic”?
The first thing to do is search the National Register and State Register of Historic Places located at www.wisconsinhistory.org/Content.aspx?dsNav=N:1160. The National Register of Historic Places is the nation's official list of historic places worthy of preservation. The State Register is Wisconsin's official list of state properties determined to be significant to Wisconsin’s heritage. If the house is not listed, the house can still qualify if the Wisconsin Historical Society provides a preliminary certification indicating the house is eligible for listing in the State Register or National Register of Historic Places. That may be accomplished with Part 1 of the Wisconsin Historic Preservation Certification Application — Evaluation of Significance. The Historic Homeowner’s Income Tax Credit Application is found at www.wisconsinhistory.org/pdfs/hp/HPR-homeowner-tax-credit-applications-2017.pdf and the instructions are at www.wisconsinhistory.org/pdfs/hp/HPR-homeowner-tax-credit-application-instructions-2017.pdf. If the homeowner wants to actually list the house in the registers, a formal nomination to the State Register or National Register of Historic Places must be submitted.
3. What kind of rehabilitation work on a historic home qualifies for the tax credit?
The Wisconsin statutes define five categories of work eligible for the tax credit:
- Exterior of the house, such as roof replacement and painting, but not site work such as driveways and landscaping.
- Interior of a window sash; if work is done to the exterior of the window sash.
- Structural elements of a historic property, such as reinforcing structural beams.
- Heating and ventilating systems, such as furnaces, air conditioning and water heaters.
- Electrical wiring or plumbing systems, but not electrical or plumbing fixtures.
4. In a nutshell, how does the application process work for the homeowner’s historic tax credit?
Homeowners apply, submitting the tax credit application with “before” photos of the property and a list of the work they would like to do. Once approved, the work is completed, tax credits are applied, and then the project is closed. A homeowner must spend at least $10,000 on eligible work within a two-year period and submit the tax credit application before beginning any work. The homeowner may request a five-year phased plan. The tax credit is maximized once the eligible expenses reach $40,000.
5. What properties qualify for tax credits for rehabilitation of commercial properties?
The building must be a certified historic structure and used for an income-producing purpose. Income-producing buildings are those used in a trade or business or for the production of rental income. For the building to be certified “historic” for purposes of the federal tax credit, it should be listed in the National Register of Historic Places or the National Park Service must find it contributes to the character of a National Register historic district. A building can also receive a preliminary determination of eligibility through the tax credit application process but the owner must formally list the property in the National Register prior to claiming any tax credits.
If an owner is only using the state tax credit, a building must be listed in the State Register or the National Register of Historic Places or must be found to contribute to the character of a listed historic district. A building can receive a preliminary determination of eligibility for the register through the tax credit application process, but the owner must formally list the property in the State Register or the National Register prior to claiming any tax credits.
6. What type of rehabilitation work can be done on a historic commercial property?
All work must comply with the Secretary of Interior’s Standards for Rehabilitation, codified as 36 CFR 67. See www.nps.gov/tps/standards/rehabilitation.htm for more information and guidelines.
7. What are the minimum amounts that must be spent for the federal and state credits for commercial historical properties?
- If an owner plans to spend an amount equal to or greater than the building’s adjusted basis value or $5,000, whichever is greater, then the owner can apply for the 20 percent federal tax credit. The adjusted basis is the price paid for the building, minus the value of the land, plus any improvements made, minus any depreciation.
- If an owner plans to spend less than the building’s adjusted basis value but more than $50,000, the owner can apply for the 20 percent state tax credit.
- If an owner plans to spend an amount equal to or greater than the adjusted basis value and greater than $50,000, the owner qualifies for both the federal and state tax credits. Both state and federal programs allow this amount of money to be spent in either a two-year or five-year period.
8. What are some tips for applying for historical commercial property tax credits?
Make sure the project meets the financial requirements. It would be wise to confer with an accountant, tax attorney or the IRS to determine whether the incentives apply to the owner’s tax and financial situation. Another wise idea is to contact a Wisconsin Historical Society preservation architect and discuss the plans for applying for the tax credit. Refer to the map at www.wisconsinhistory.org/Content.aspx?dsNav=N:1214 to find the architect for the area where the property is located. The architect can confirm whether the building is a certified historic structure and review the preliminary details of the project to determine whether the work meets the Secretary of Interior’s rehabilitation standards. These tips may also prove prudent for a homeowner planning to work on a historical home.
9. What are the benefits of having a property listed on the National Register and the State Register?
- The property owner is eligible to apply for state or federal income tax credits for the rehabilitation of historic property.
- Eligibility for federal grants, when available.
- Consideration in the planning of federally assisted and state-assisted projects, as well as projects of local governments and school boards, when those projects affect the property.
- Qualification for state and federal charitable income tax deductions for the donation of historical preservation easements.
- Eligibility for official State Register of Historic Places plaques.
- The knowledge that the owner is helping to preserve local, state and national heritage.
- A private owner is free to sell, alter or demolish the property, and is not required to preserve it unless the owner seeks rehab funding.
10. What are the common myths regarding historic properties and districts?
Many times, potential owners believe any historical property will be subject to strict restrictions and the owner will be unable to make modifications, often emanating from local community historic preservation designations and historic district zoning. However, the restrictions in these districts typically only apply to features that can be seen from the street, generally allow rear modifications to a structure, and don’t apply to the design and use of the interior. The interior may be subject to review, however, if tax credits or other grants for rehabilitation work are received. Others fear that the property value will decrease when studies illustrate an increase in value. For further information dispelling common myths relating to historical properties, see www.wisconsinhistory.org/Content.aspx?dsNav=N:4294963828-4294961312&dsNavOnly=N:1212&dsRecordDetails=R:CS4229.
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Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.