Update 1 June 2011: Dave Mcnair at the HooK has a great story using this story as a part of his premise: Extreme makeover: rich edition– State program benefits those who need it least
(guest post by Brian C. Broadus)
The Commonwealth of Virginia wants you to pay it less tax. Really.
The Virginia Department of Historic Resources, the preliminary-through-final-judge of whether work on your old house suits Virginia Rehabilitation Tax Credit Program, secures the patrimony of Virginia. The Tax Credit Program creates jobs, which in turn generates popular support for the Department and still more rehabilitation projects. Every bureaucrat there, and every private professional with whom you will deal, will have ranked two priorities: First, protect the Commonwealth’s interest in its archeological and architectural history. Second, get you your Rehabilitation Tax Credits. Frankly, as an architect who has specialized in building rehabilitation, renovation, restoration, and repair for nigh on 22 years, I share a sentiment that pervades the historic preservation community, including the staff at the Commonwealth Department of Historic Resources: This is free money. Why don’t more homeowners come and grab it?
Tax incentives to refurbish owner-occupied historic homes are rare in the United States, but Virginia has such a program. The Federal government concentrates on income-producing properties. Virginia tax credits this work, too, and that’s a topic for another blog post. In fact, non-profit entities and municipalities can, and do, use tax credit subsidies. Again, we’ll touch on these aspects of the law another time.
But, about your old house. You can erase 25 percent of a rehabilitation’s “qualifying expenses” (See below.) from your state tax. If the credits exceed what you’ll pay in Commonwealth taxes in ten years, you can form a limited liability corporation to syndicate them. (It’s surprisingly easy to do.) Most of these entities dissolve after five years. You can keep a controlling property interest, but you can’t sell you house so long as the LLC exists. If there’s no such binding entity, you can sell the house as soon as it’s complete and still keep the tax credits.
Yes, there’s paperwork. But, I’ve seen the process work well on a project with a total construction budget of $250,000. Credits are worth pursuing if the construction budget is as low as $150,000.
The rehabilitation cost must exceed 25 percent of the most recent assessment of your house. Note: house. Not location, but construction.
The house must be a) listed on the Virginia Landmarks Register or b) a “contributing structure” to a Virginia Landmarks Register District or c) judged “register eligible.” The Department of Historic Resources has an online database of Landmarks and Districts (See link below.). A “contributing structure” makes a District a Landmark. It will be listed in the District Register Nomination Form according to street address. There will probably be a photograph, too. If Landmark District designation is officially pending, and your house is listed as contributing to that District, you may proceed with your rehabilitation project. But, if the District is not approved within one year of your project’s completion, the you lose tax-credit eligibility.
Important: an Architectural Control District, with a Board of Architectural Review, is emphatically not a Landmark Register District.
The third qualification category is mere register-eligibility. Hire, well, me to inspect your house. If it’s a good candidate, I’ll prepare a Preliminary Information Form, a summary National Register Nomination Form. I won’t do it unless I’m sure it will be accepted by the Department of Historic Resources. The staff there will score it and forward it to the State Review Board. Once the house is officially “register-eligible” you can proceed with tax-credit work in confidence.
There are three Parts to the Rehabilitation Tax Credit Application, each one submitted to the Department of Historic Resources. Part One is waived for individually-registered houses: it’s photos of the house interior, which are already part of a full Register Nomination. Part Two depicts your planned rehabilitation. You need an historic architecture architect. The work is rehabilitation: our team is bringing an uninhabitable or archaic structure into service. Therefore, the Secretary of Interior’s Standards for the Treatment of Historic Properties: Rehabilitation (See link below.) guide the work. Part Two documents are preliminary. The Owner has the biggest say. We present our preferred design to the Department of Historic Resources and negotiate details with its historian. We get agreement and proceed with builder documents.
An Owner gets 25-percent credit for all “qualifying expenses.” These are soft expenses (historian’s, architect’s, engineer’s, lawyer’s, accountant’s fees, printing, travel) and rehabilitation hard expenses. Demolition costs qualify, if re movals conform to Application Part Two. Power system replacement, including light fixtures, switches, outlets, cover plates, and other devices, is a qualifying expense. Payment for heating, ventilation, and air conditioning systems, data systems, alarm systems, fire protection systems, foundation waterproofing systems, lightning protection systems, plumbing systems, brick repair and mortar repointing, siding repair and replacement, and re-roofing and guttering, are qualifying expenses. These are big-ticket items. Re-building an original porch or house wing that has been eaten away by termites is a qualifying expense. Structural repairs of any kind qualify. Rebuilding a missing character-defining element, such as a bay window, which can be very well documented through old photographs, is a qualifying expense. Putting back missing window shutters is a qualifying expense. None of these things prevent the Owner from getting energy-conservation or other Federal or local tax credits. And, the work can be coordinated with green-building standards.
Non-qualifying expenses: if you invert your house and shake it, and something tumbles out, you lose. Forget moveable furnishings and window treatments. An addition, except in the very rare circumstance that the addition makes the original house habitable, will not qualify. Kitchen appliances are ineligible. Replacement windows qualify if proposed and accepted during Application Part Two. Earthwork for protective drainage and for septic field and well installation qualifies. No other work outside the house will.
Each pay request your general contractor submits should note credit-worthy expenses. Your accountant will review these.
I submit Part Three of the Application when you’re ready to move in: photographs that illustrate that we did what we said we would do in Part Two. The Department of Historic Resources asserts in writing that the outcome conforms. Your accountant hands the report of qualifying expenses to the Commissioner of the Revenue along with the VDHR confirmation letter. The Commissioner then verifies that the expenses are qualifying and confirms the credit. The Commissioner sends you a letter enumerating the tax credit, which you file with your state taxes. It’s that simple.
Oh, if, at any point during this process, you cannot resist the urge to paint your house lime green, or international orange, or white with red polka dots, there’s no rule or regulation or tax credit standard that will stop you from doing so.
Brian Carter Broadus LLC Architects
American Institute of Architects United States Green Building Council
Charlottesville Virginia 22903 USA