In a previous post, we looked at the effect of Historic District on property values. Now let's look at the tax benefits available to homeowners in a Historic District. They can be very significant, so it is worth learning about this.
There are two tax programs that benefit owners of contributing houses in a National Register Historic District.
"Contributing" means that when the district is listed, that house is included in the list of historic houses that have retained enough of their original features that they contribute to the historic character of the district. If a house is not included on that list, it is "non-contributing" and not eligible for the tax programs.
"National Register Historic District" means the neighborhood (district) is listed in the National Register Of Historic Places. If a neighborhood has some lower level of historic designation, like a local conservation district, that's not the same and the contributing houses are not eligible for the tax programs.
So what are these programs? There is a Oregon Special Assessment property tax program, and a federal Historic Tax Credit program.
Oregon Special Assessment program.
This program essentially freezes ("special assessment ) the tax assessed value of the eligible property for 10 years, renewable for another 10 years. To be eligible, the homeowner has to have a plan for significant rehabilitation of the house. He or she would want to apply for the special assessment before doing the work, so that the tax assessed value is the lower, pre-rehabilitation value.
"The program specially assesses a property's assessed value for 10 years. It is most effective when the program is in place prior to any substantial rehabilitation of the property.
Basic program requirements are as follows:
The property must be listed in the National Register of Historic Places, either individually or as a contributing property in a historic district, or be considered historic by the State Historic Preservation Officer, and listed within two years of being certified for the benefit program.
A preservation plan must be prepared that outlines substantial rehab work the building will undergo during the 10-year period, with emphasis on exterior rehabilitation of the structure.
There is an application fee equal to 1/10 of 1% (0.001) of the assessed value.
10% of the total real market value (RMV) of the property must be invested in rehabilitation within the first five years of the program. For most properties, this includes the RMV of both the building (improvements) and the land.
State Historic Preservation Office (SHPO) approval or local government approval, which ever is appropriate, is needed for exterior projects, and interior projects of substance.
An approved plaque provided by the Oregon SHPO must be installed on the building.
To receive the maximum benefit, an application should be submitted BEFORE any rehabilitation is undertaken. This helps assure that the specially assessed value is the PRE-rehabilitation value.
Special note regarding second 10-year term of the Special Assessment benefit --
Owners of commercial property are eligible to reapply for a second term without needing local government approval.
Owners of residential property are only eligible to reapply for a second term if their local government has not passed an ordinance or resolution PROHIBITING a second term. (Currently, SHPO is unaware of such prohibitions.)
The Preservation Plan for a second 10-year term is limited to the following types of projects: energy conservation, ADA compliance, seismic improvements, or sustainability, with an investment that meets or exceeds 10% of the total Real Market Value of the property at time of application."
To be eligible for this program, the building has to be income-producing, which can include a rental house or a commercial building. The owner has to do a significant rehabilitation of the house. He or she can then receive a federal income tax credit equal to 20% of the cost of the work.
The incentive is a federal income tax credit equal to 20 percent of the rehabilitation costs (Example: $500,000 rehab project = $100,000 tax credit applied to federal income taxes).
The building must be listed in the National Register of Historic Places, either individually or as a contributing building in a historic district.
Rehab work must meet the Secretary of the Interior's Standards for Rehabilitation.
NPS and SHPO approval are required before the project is completed, preferably even before it is started in order to avoid ineligible work and expenses.
The building must be used for income-producing purposes after its rehab.
The rehab project must be substantial, exceeding either the "adjusted basis" of the building or $5,000, whichever is greater.
"Adjusted basis" is the purchase price minus the value of the land minus any depreciation already taken by the current owner of the building, plus any capital improvements"
How Much Can These Programs Save You?
Here is an example of how this can help the homeowner.
Let's assume it is 2018, your house has tax assessed value of $400,000 and you plan to spend $200,000 on a major rehabilitation of the house.
Normally, when you finish the work, the assessed value of the house will be increased by the value of the improvements. So normally, your rehabilitation would result in a re-assessment, potentially to $600,000, and thus your property taxes would jump higher because of the value you added to the house. In this example, 50 percent higher. If your property tax rate is 1.5 percent, that can be an increase in your property tax bill from $6,000/year = 1.5% of $400,000) to $9,000/year = 1.5% of $600,000).
What we just discussed has nothing to do with being in a Historic District; whether you are in a historic district or not, a major improvement to your house triggers a tax value re-assessment. The tax assessor calls it an Exception Event.
Now let's suppose you are fortunate enough to own a contributing house in a National Register Historic District, and your rehabilitation qualifies for the State Special Assessment program.
The Special Assessment program will delay the re-assessment and property tax jump for 10 years, to 2028. If you do more work for energy efficiency, disabled/elderly access, or seismic protection that qualifies for the extension, then the re-assessment will be delayed for another 10 years, to 2038.
When the re-assessment finally happens, your property tax will go up, but to only what it would have been without the Special Assessment. You have saved money on property taxes for the past 10 or 20 years. No, you don't pay back those decades of tax savings. That assumes the work qualifies and you follow the application process for the program: contact SHPO for guidance.
Now, during that 10 or 20 years, your house's tax assessed value may be adjusted at most 3 percent per year due to rising market value - that happens to every house, historic or not - but they cannot jump 50 percent due to the rehabilitation work you've done to the house.
This can be serious savings.
Suppose the property tax rate on your house is 1.5 percent, which is pretty typical in Portland, and assume assessed values are being adjusted up by by the maximum 3 percent per year.
In the first year, 2019, the Special Assessment can save you $3,000 in property tax. Over the first 10 years, the Special Assessment can save you $34,000 in total property tax paid. Over the full 20 years, the Special Assessment can save you $80,000 in total property tax paid.
Now let's also assume that this is an investment house for you - you are renting it out for income.
The federal Historic Tax Credit program can get you a federal income tax credit of $40,000, which is 20 percent of $200,000. A credit directly reduces income tax liability. Again, that assumes the work qualifies and you've correctly applied: contact SHPO for guidance.
If you want to see the calculation in a spreadsheet, email firstname.lastname@example.org.
The tax benefits we have discussed are only available to contributing houses or buildings, in a National Register Historic District.