Many national markets continue to emphasize a “newer is better” mentality. However, Birmingham and Alabama as a whole have placed a significant focus on investing in buildings with a nationally certified historic status. In short, while many areas tear down historical sites and structures, our state continues to restore, redevelop, and celebrate them.
Understanding Federal Historic Rehabilitation Tax Credits
One key factor contributing to our region’s growing reputation for renovating and repurposing older commercial properties is the current state and federal historic property tax credit programs. The Historic Tax Credit (HTC) initiatives first launched due to growing national recognition that older residential and commercial real estate properties were more than just sound investment opportunities. These designated historical buildings are invaluable cultural assets, both to our nation as a whole as well as to the shared history of local communities, making their preservation a vital link to our country’s past.
Of course, recognizing the importance of maintaining these properties was merely the first step in motivating investors to take on the expense, time, and potential risk of this type of restoration. As with any commercial real estate venture, success often relies on location. Unfortunately, many certified historic properties are located in designated disaster areas and lower-income communities – regions typically perceived as undesirable for investment.
Concerned about the potential return on investment due to address or zip code, many would-be buyers dismissed the idea of purchasing and restoring older buildings and homes. Enter federal and state tax initiatives. The Federal Historic Preservation Tax Incentive program offers two tax credit options for commercial real estate property buyers:
20% Tax Credit
This represents the biggest federal government backed tax deduction. To be eligible for the 20% tax exemption, investors must follow a specific list of requirements including rehabilitating a certified historic structure as an income-producing property. Additionally, owners are not allowed to occupy the building and must adhere to all restoration requirements to claim the expenses.
10% Tax Credit
If an older investment property is not technically considered “historic,” it may still qualify for a designated credit come tax time. The 10% exemption helps diffuse the cost of restoration for certain non-historic buildings that were operational before the year 1936. Eligibility hinges on specific criteria that outline percentages of structural framework and walls that must be maintained throughout the renovation.
Historic Property Tax Credits At The State Level Helps Further Defray Expenses
While the federal exemptions promote investing in older properties throughout a specific region, it’s often not enough to help all motivated buyers justify the extensive costs versus potential ROI. Fortunately, beyond nationwide initiatives, many states also offer specific historic property tax credits and deductions to further overall value and drive total incentive amongst buyers. Each state’s legislation and credit percentages may differ. However, Alabama offers local buyers a competitive tax credit program, encouraging our local investors to tap into this unique commercial real estate market to both increase financial gain and preserve our state’s history
Passed in 2017, the new Alabama Historic Rehabilitation Tax Credit program historic tax credit initiative offers investors a 25% refundable tax credit for owners of both residential and commercial properties that meet the requirements listed in the National Register of Historic Places and are 60 years old and older. Much like the national program terms, investors don’t merely receive the tax benefits for purchasing the historic property; instead, they must rehabilitate these structures according to specific mandates to maintain eligibility for the deduction.
Is Owning And Restoring A Historical Property Right For You?
Yes, there are many financial benefits to purchasing an older commercial property. Tapping into the current exemptions reduces overhead expenditures for buyers as they transform their building from historical landmark to revenue-generating property. Additionally, the process creates and sustains jobs in local, possibly lower-income communities.
However, as with any commercial real estate investment, it’s important to know the rules and regulations associated with this type of transaction. With so many state and national requirements to consider, it’s vital to consult with real estate, legal, and accounting professionals before moving forward with a purchase to ensure you’re adhering to local and federal mandates and optimizing tax credits for maximum financial return.
Contact Southpace Properties Today
Are you interested in purchasing a historic Alabama property? Contact Southpace properties today to hear more about the benefits offered through this unique commercial real estate investment.
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