10 Incredible Tax Benefits of Owning a Historic Property

Benjamin Franklin famously said, "Nothing can be said to be certain, except death and taxes." However, he didn't foresee that owning property from his era could allow you to avoid one of those certainties. While historic properties can be challenging—think of the chaos in "The Money Pit" with Tom Hanks and Shelley Long—they also carry significant civic value. If you're willing to invest in preserving a historic building, the government is often ready to offer financial assistance in return.

Numerous tax incentives are available at the local, state, and federal levels to help those who take on the responsibility of maintaining historic properties. This article highlights some of the most valuable incentives, including federal tax breaks and common state and local programs. It's also a good idea to consult with your state's historic preservation office or a tax expert familiar with local property tax incentives to learn about any grants, breaks, or endowments that might be available to assist with local historic preservation [source: National Trust for Historic Preservation].

10: National Park Service

Are you surprised to learn that the National Park Service (NPS) is your first destination when seeking historic property tax benefits? The NPS collaborates with the IRS to manage the Federal Historic Preservation Tax Incentives Program. Their certification for listing on the National Register of Historic Places (NRHP) is your key to tax savings and the easiest way to officially recognize your property as a historic site [source: National Park Service]. Keep in mind that in order to qualify for federal tax breaks, you must not only have your property listed on the NRHP but also submit detailed renovation plans for the site. It’s these renovations that will earn you the tax relief.

If you’re considering purchasing a historic property with plans for future renovations, check the NRHP to ensure it’s already listed (or make the successful registration a condition of sale) [source: National Park Service].

9: Federal Historic Preservation Tax Incentive

It’s that simple: Once your property is designated as historic, the federal government will reimburse you 20 percent of the money spent on renovations (once your application is approved). Both the designation and renovation applications can be found through the National Park Service.

There are a few important conditions to consider. First, the property must generate income. You can't qualify for this tax break by simply renovating your home—unless, of course, you have a home office or rent out part of your property. In that case, you can apply for the 20 percent credit for the renovations made to the income-generating areas. This is a common tax benefit for bed-and-breakfast establishments.

Second, your renovation plans must align with the "historic character of the property" [source: National Park Service]. The Secretary of the Interior has outlined 10 guidelines that must be followed in order for your renovation project to qualify for the 20 percent credit.

8: State Tax Credit

If you reside in one of the 31 states (as of 2011) that offer tax credits for renovating historic buildings, you may be able to enhance your savings [source: National Trust for Historic Preservation]. Most states recognize that older, historic buildings are typically situated in key economic areas like downtown districts. The increase in property value from renovations often extends beyond just your property, benefiting the neighborhood as a whole. As a result, your state may be inclined to help you fund these improvements.

A major advantage: Many state tax credits aren’t restricted to income-producing properties. While federal tax credits apply only to businesses, you might still qualify for a state tax incentive even if you're renovating your personal home. Additionally, you may not need to be individually listed on the NRHP to be eligible. If your property contributes to the overall character of a historic district or has been designated as a landmark locally, you should explore this credit further.

7: Additional State Benefits

In California, there’s the Mills Act. In Oregon, it’s the Special Assessment of Historic Property Program. Wisconsin offers the Supplemental Historic Preservation Credit, and Arizona has the Historic Property Tax Program.

No matter the name, many, if not most, states provide programs that lower the property taxes for historic buildings. Since these programs are managed at the state level, the requirements and benefits can vary depending on where your property is located. A quick search using the terms "tax, historic, and state" should help you find the right program in no time.

Keep in mind that these programs can offer very different types of breaks. While the previous pages focused on tax relief for renovations, many state-specific credits provide reductions on your annual property taxes. These state programs can help you save money directly, rather than spending it to get a refund.

6: Easements

In simple terms, an easement is an agreement between a property owner and a representative from a historic preservation group. (Some state programs even fall under this category.) In exchange for your commitment to preserving the property's historical integrity, you may enjoy significant tax benefits, including reductions in income tax, estate tax, or property tax.

Keep in mind that easements can last forever. Once agreed upon, they are formalized as a deed and attached to your property’s title, which is passed down to future owners. This can be a great selling point – who wouldn’t appreciate lower taxes and the allure of owning a certified historic property? However, it may also deter potential buyers who wish to make drastic changes, like turning your Victorian house into a more modern style.

Preservation societies that fund easements operate at the local, county, and state levels. You can easily find them by performing a quick online search.

5: 10 Percent Rehabilitation Credit

Having difficulty getting your property officially labeled as "historic"? You might still qualify for tax incentives on renovations for your business. If your building has been in use since before 1936, you may apply to receive a 10 percent tax credit on the cost of preserving its original features. For instance, if you spent $100,000 to renovate a 1935 building housing your business, you could receive $10,000 in tax credits.

Similar to the 20 percent renovation tax credit for properties listed on the NRHP, the 10 percent rehabilitation credit for businesses in buildings constructed before 1936 is managed by both the National Park Service and the IRS [source: Internal Revenue Service].

4: Grants

Several private philanthropic organizations focus on preserving historic buildings. If you own one of these properties, you may be eligible for their financial assistance. Typically, these grants are aimed at renovations or preservation, either reimbursing a percentage of the amount spent or, in rare cases, providing outright funding for preservation efforts.

For instance, the Johanna Favrot Fund for Historic Preservation offers grants ranging from $2,500 to $10,000 for nonprofit or government entities that are restoring historic buildings. Similarly, many businesses also engage in preservation efforts; an example of this is the American Express Partners in Preservation program, which provides funding for the restoration of historic structures and landmarks.

There are numerous other grant opportunities available for private, public, and nonprofit organizations. A great starting point for finding these grants is your state preservation office or the nearest branch of the National Trust for Historic Preservation.

3: FHA Loans

Imagine this: You've made an offer on your historic dream home, contingent upon a successful inspection. However, the inspection reveals $35,000 worth of damage -- a significant setback. Fortunately, the federal government has a vested interest in seeing this sale succeed. An abandoned or dilapidated property can negatively impact an entire neighborhood, while a restored historic property can breathe new life into it. As such, the Federal Housing Administration (FHA) offers a program that allows $35,000 in renovation funds to be added to a pending mortgage at favorable terms.

If you're considering purchasing a fixer-upper, you may find yourself without many incentives. However, if that fixer-upper happens to be a historic property, you might be in luck.

2: Tax Freeze

In an ideal world without market fluctuations, your property would naturally increase in value over time. However, this also means that as the appraised value of your home rises, your property taxes will go up too, unless you manage to secure a tax freeze.

By collaborating with your local historic preservation office, a main street revitalization group, or a historical society, you may be able to negotiate a freeze on property tax increases. These freezes often last for 10 to 15 years and are typically contingent on your commitment to renovate the historic property or maintain it without making major changes to its character.

1: Preservation Contribution

Imagine donating part of your land to a nonprofit conservation trust. In return, you'll likely receive a significant tax break from the charitable donation deduction, and your property taxes will also decrease because your property value is lower (since you've donated part of it).

The same concept applies to developed properties. If you own a historic building, you can often arrange to donate its facade, interior, landscaping, or any other feature that contributes to its historic status. For instance, if you transfer ownership of the front of your historic property to a preservation organization, the value of that facade counts as a charitable donation. This reduces the value of your property and, in turn, your property taxes. However, you’ll pay for these tax advantages through restrictions on renovations.