Costs
Historic Home Tax Credit: What Renovation Costs Qualify?
Historic home tax credit renovation costs depend on which expenditures qualify and whether the building produces income. Here is how the 20 percent credit works.
What to take away
- The federal credit is 20 percent of qualified rehabilitation expenditures, and it generally reaches buildings used in a trade or business rather than a house you live in.
- Acquisition costs, enlargement costs and site work fall outside the credit.
- Spending must clear the substantial rehabilitation test, measured over 24 months or 60 months for a phased project.
- A qualifying whole-house rehabilitation commonly runs from about $80,000 to $250,000 before the credit is applied.
- The credit is claimed over five years and can be recaptured if the building is sold or changes use within five years.
Who can use the federal credit
The rehabilitation credit is worth 20 percent of qualified rehabilitation expenditures on a certified historic structure. The National Park Service certifies the building and the rehabilitation; the Internal Revenue Service decides the tax result. Start with the National Park Service overview of federal historic preservation tax incentives, which lists the certification parts in order.
Does Your Building Qualify?
Is the building income-producing?
20% federal credit possible
Owner-occupied fails test
Use decides eligibility. The building must be used in a trade or business or held to produce income. A house you occupy fails that test, which is why the 20 percent credit is often called a commercial credit. Rent a unit or run an office from the building and the picture changes.
State programs cover part of the gap. Maryland runs a homeowner credit for owner-occupied historic houses. Texas has tied its credit to income-producing property. Confirm the current terms before you plan around them, and keep a restoration costs checklist as the paperwork accumulates.
The substantial rehabilitation test
The rehabilitation has to be substantial. Qualified expenditures during a 24-month measuring period must exceed the greater of $5,000 or your adjusted basis in the building. A phased rehabilitation may use a 60-month period instead.
Substantial Rehabilitation Threshold
Low purchase price
- Adjusted basis
- Low
- Threshold
- Easy to clear
- Cosmetic refresh
- May qualify
High purchase price
- Adjusted basis
- High
- Threshold
- Hard to clear
- Cosmetic refresh
- May never qualify
Adjusted basis is normally purchase price plus capital improvements, minus land and any depreciation taken. Buy a building cheaply and the threshold is easy to clear. Buy at a high price and a cosmetic refresh may never qualify, no matter what it cost.
Line items that count
| Line item | Illustrative cost | Counts as a qualified expenditure |
|---|---|---|
| Structural and masonry rehabilitation | $25,000 to $70,000 | Yes |
| Window and door rehabilitation, in kind | $12,000 to $40,000 | Yes |
| Roof replacement and flashing | $15,000 to $45,000 | Yes |
| Mechanical, electrical and plumbing upgrades | $20,000 to $60,000 | Yes |
| Rear addition above 25 percent of floor area | $40,000 to $120,000 | No, enlargement |
| Landscaping, parking and site work | $8,000 to $30,000 | No |
Acquisition never counts, and neither do furnishings or paving. The IRS instructions for Form 3468 set out the categories, including the rule that work adding more than 25 percent to a building's volume or floor space is an enlargement. Plaster is often the largest interior line, and plaster repair lessons from real jobs show how quickly that figure grows.
What moves the number
- Building use. Owner-occupied space reduces the share of the project that qualifies.
- Scope mix. Structure and systems qualify; site work and additions do not.
- Enlargement share. Cross the 25 percent line and that portion drops out of the claim.
- Measuring period. A 60-month phased schedule can clear a threshold that 24 months cannot.
- State credit design. Caps, competitive rounds and occupancy rules change the total benefit.
Lead-safe work is a separate addition to the bill. Rehabilitation of a pre-1978 house falls under the Lead Renovation, Repair and Painting Program.
Certified crews, containment and cleaning are project costs, not a credit line of their own. Where an earlier owner's work must come out first, undoing a previous owner's mistakes explains why those dollars behave differently.
Example: a $180,000 qualifying rehabilitation
Take a 1908 duplex held as a rental. Total construction reaches $285,000. Site work accounts for $45,000 and a rear addition for $60,000, both removed. That leaves $180,000 of qualified expenditures and a federal credit of $36,000, claimed at $7,200 a year across five years. A state credit, where one applies, sits on top.
The credit reduces the depreciable basis of the building. It is not a rebate, and it does not arrive as cash in the year the work finishes.
