Restoring Historic Homes: A Primer

With home prices at historic highs and tax incentives for restorations available, fixing up a fixer-upper might be worth considering. But look before you leap.

By Cameron Huddleston, Contributing Editor, Kiplinger.com

May 12, 2006

Tax incentives

For two years, Kim and David Jones worked to bring a 130-year-old condemned Italiante house in Bowling Green, Ky., back to life. They spent at least $140,000 converting the property, which had been divided into apartments, back to a single-family home. Because their home was in one of the city's historic districts, they got the necessary approval for all exterior work they did because the local historic preservation board has strict standards for maintaining the character of a historic home.

Even though they were careful, the Joneses made a decision that cost them a valuable tax credit: While working on the interior, they decided to leave the brick exposed in the foyer after the plaster fell off the wall as they were tearing off and rebuilding a staircase. No restoration, no tax credit.

Since January 2005, Kentucky has been offering homeowners who spend at least $20,000 restoring a historic house a tax credit worth 30% of their total expenditures (capped at $60,000). To get the credit, you have to show before and after pictures and adhere to the U.S. Secretary of Interior's rehabilitation standards, which Joneses didn't realize applied to the interior of a home, too.

"We were told an Italianate house would not have exposed brick in the foyer," Kim Jones says. "Because of that, we didn't get one penny (of the tax credit) ... It was a slap in the face."

The lesson here is obvious: If you hope to take advantage of a tax incentive, check with your local or state preservation board before doing anything, Kim says.

Homeowners hoping to get a tax break for fixing up a historic home should look to their state or city, not the federal government. That's because the Federal Historic Preservation Tax Incentives program provides incentives for rehabilitating income-generating historic properties such as offices, rental housing, and retail stores -- not private homes.

But be warned: In many states, funding for tax credits is limited. Kentucky has a $3 million annual program cap. Louisiana provides only $1 million in annual funding for its tax credit program.

There's another catch: The tax credits are worth less than face value when federal taxes are taken into consideration, according to NTHP. When considering the in-your-pocket value of the state credit, remember that reducing the amount of state taxes you pay reduces your federal tax deduction for state taxes paid -- cutting the value of the credit by as much as 35% if you're in a high income-tax bracket. Also, a state tax credit can trigger a short-term capital gain, which can be taxed up to 35%. All in all, the typical after-tax value of state tax credit is about 55 cents on the dollar, according to NTHP.

Scot Hinson's House: After

Check with your city's historic preservation board, though, because you might find you are entitled to a city tax abatement or moratorium. Ellena says Richmond, Va., abates the real estate taxes over ten years on houses 15 years or older that have been improved in value by at least $20,000.

Worth it? Well, take a look at Ellena's brother's labor of love in Savannah and decide for yourself.

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