Historic homes have so much beauty and character, but turning one from a time capsule into a home for modern living can be daunting. 

Historic house restoration brings challenges: leaky windows, sagging structure, rotten siding and trim, rusty plumbing, knob & tube wiring. Those challenges can be scary for a new homeowner and even seasoned contractors.  And we haven’t even talked about cost!  But don’t worry, there’s hope. Restoring a historic home can be a rewarding challenge and by leveraging the right tax credits, you may be able to offset some of those renovation expenses.

The right people make all the difference

First, always surround yourself with the right team. A historic restoration project can only be successful when you have a good group of people supporting you. Many times, that means having a historic preservation architect creating your plans.   

Second, for as many challenges as there may be with historic homes and renovations, there are equally important benefits. One of those is access to state and federal tax incentives for rehabilitation of historic buildings.  These aren’t just tax deductions.

These are tax credits of 10% to 25%, which can be used on your tax liability over three to five years. It’s like getting a 25% off coupon for your renovation! These credits can be applied to your individual income taxes or an entity’s taxes, not your property tax. And your property must be located in a National Register of Historic Places (NRHP) District or deemed eligible by the South Carolina State Historic Preservation Office (SCHPO).

Now I have your attention!  As a historic preservation architect in Charleston, I’ll focus on tax credits available through the SCHPO and walk you through how they work.  

What types of projects can benefit from tax credits? 

There are both state and federal tax incentive programs for the rehabilitation of historic buildings. Residential, commercial, mixed use, and even abandoned buildings can benefit from these programs. 

The buildings that are the best candidates are those with good “bones” in need of a lot of structural, exterior, or MEP (mechanical/HVAC, electrical, plumbing) work to bring them up to date.  Buildings with deferred maintenance are also good prospects.

Because tax incentive programs have jurisdiction over the whole house (interior and exterior), these programs are not suitable if you intend to fully gut the interior, remove key components (stairs, fireplaces, etc.), or rework the floor plan. After all, the goal is to support rehabilitation and restoration of historic buildings.  

Incentives for income-producing buildings

Commercial buildings are also eligible for both state and federal tax credits.  The application goes through SCHPO,  which coordinates with the National Park Service for federal approvals. There is a 10% state credit plus 20% federal credit available on all applicable rehabilitation costs.

Incentives for owner-occupied buildings

Residential buildings are eligible for a 25% state (but no federal) tax incentives.  The application process goes through the South Carolina SHPO. 

Remember that SCHPO then has jurisdiction over the interiors as well as exteriors.  These credits are not for everyone; a homeowner must be willing to follow the Department of Interior Standards for historic preservation. 

Mixed-use buildings, which have both residential and commercial uses, can benefit from both types of tax incentives above.  The rehabilitation costs are divided by the percentage of square footage allocated to each use.

For example, at my State Street project, the Horton Hays Gallery uses 55% of the total building square footage, so the building owner received a 20% federal credit and 10% state credit back on 55% of the total applicable rehabilitation costs. Additionally, the building owner received a 25% state tax credit for the other 45%, as related to the owner-occupied portion of the building.  

This particular project was primarily an exterior restoration, where the masonry walls, windows, doors, and roof needed significant repairs.  The interiors mostly remained intact (no new kitchens).  In this case, about 80% of the total construction costs were considered “applicable rehabilitation costs,” which led to tax credits of over $200k!

That’s a lot of money, right?!  These are income tax credits (not deductions) reducing your tax payments, dollar for dollar.  The credits can be spread over three to five years.

While the IRS does not allow the tax incentives to be bought or sold, a taxpayer can invest in a project and then validly claim the tax credit. I strongly recommend you contact a tax professional who is knowledgeable about these types of tax incentives and familiar with your specific tax situation.  

How are the costs and incentives calculated? 

It’s important to understand that only certain construction expenses are applicable.  This includes:

• Exteriors (siding & trim repairs, stucco, masonry repointing, porches)
• Structural systems (repairs to foundations, floor systems, wall framing, roof structure, repointing structural masonry walls)
• Historic plaster
• Energy efficient systems (storm windows, some insulation)
• HVAC, electrical, and plumbing (such as ductwork, wiring, and plumbing inside the walls)
• Architectural and engineering fees

What’s not included (head to page 34 of the linked PDF for more details)? Finish items such as flooring, tile, light fixtures, plumbing fixtures, drywall and paint are not included. 

Which portions of the project must be reviewed and approved? 

These programs cover the exteriors and interiors of buildings, and proposed work must follow the Department of the Interior Standards for Historic Preservation. 

In Charleston, repairs and changes on the exterior of most historic structures must be reviewed by the City’s Board of Architectural Review (BAR), so you’re halfway there.  The BAR uses the same standards as the tax incentive programs. In addition, if seeking a tax credit, the interior of the project must be reviewed for compliance, including changes to interior walls, stairs, fireplaces, and even finish materials such as plaster vs. wood paneling.

What is the process of using these savings on your restoration project? 

Patience is critical in any restoration process, but even more so when dealing with tax incentives.

We want to start swinging that sledgehammer, but we must plan, and submit, and wait for approvals before starting construction. The first step is to submit the S1 form to SCHPO, which proves the historic significance of your building.

If your project is in the Old and Historic District of Charleston, or the building is listed on the National Register of Historic Places, the S1 application form will be easily approved.  In addition, S2 application must be submitted, explaining the existing condition of the building and the proposed repairs, renovation, additions, and changes. The S2 form is often submitted to SCHPO at the same time as the S1 form.  Only after both S1 and S2 are approved can you start the construction work. 

Once construction starts, there’s a chance you’ll find something unexpected, or you’ll change your mind on a design feature.  Any changes to the design and/or the scope of work during construction must be immediately submitted to SCHPO for review and approval, or you’ll endanger your chances of getting the tax incentive in the end. 

After construction is completed, you will submit the S3 form to SCHPO.  This documents the finished project with photos, showing that it matches what was proposed in the S2 form.  The construction costs are also documented to show totals and which costs are applicable to the incentive.

Your architect and contractor can help with the tax incentive application materials.  There are also specific consultants who specialize in historic preservation research and are experts in the tax incentive application process, such as BVL Historic Preservation Research.

So, where do we start?

This article may have only made you feel more overwhelmed about your historic home project, and I apologize for that. But again, there is hope! 

• First, create the right team, surrounding yourself with an architect, contractor, and engineers (if needed) who understand historic homes and have extensive experience. Your team also, in some ways, includes the preservation groups, City and SHPO staff, and even neighbors, as they can provide valuable insights about the history and preservation of your project.
• Do your research to understand historic preservation standards and practices. You’ve started that by reading this article, which will link you to additional resources.
• Finally, and probably most importantly, be patient. Document, plan, and wait for the S1 and S2 approvals, before you start demo.

Remember you are only a temporary steward, caring for an historic house for future generations.  For that, I am grateful to you! For more on where to start, check out this blog .  If I can provide any help or answer questions, you can reach out to me.