Rehabilitation Tax Credits for Owner-Occupied Buildings

What is a Tax Credit?

Tax credits are one-time reductions of the amount of income taxes you owe to the State of Maryland. For rehabilitation projects, you can receive a tax credit equal to 20% of the qualified work you undertake on your historic home, provided that the building has both been certified as historic AND the work has been approved by the Maryland Historical Trust prior to starting.

For example - you own a home listed in the National Register of Historic Places and decide to replace the roof.  Prior to starting construction, you submit an application and get approval from MHT and all applicable local historic preservation commissions, and MHT certifies that the work is consistent with the Secretary of the Interior's Standards for Rehabilitation. The total cost of the roof replacement ends up being $10,000, and you send MHT the final Part 3 application along with all receipts and photographs necessary to verify the expenses and that the work is consistent with the initial approval.  If the Director determines that the project is approvable, you will be able to deduct $2,000 (20%) from the amount of Maryland State Income Taxes that you owe for the calendar year in which the project was completed. If you owe less than $2,000 in income taxes that year, you will receive a refund check from the Comptroller of Maryland.

Eligibility

The first step homeowners must take is to determine if their property is a single-family, owner-occupied residence and is eligible for the tax credit as a “certified historic structure.”  Buildings that are single-family, owner-occupied residences are defined as “a structure or a portion of a structure occupied by the owner and the owner’s immediate family as their primary or secondary residence.”  Single-family, owner-occupied can also include “a residential unit in a cooperative owned by or leased to a cooperative housing corporation…and leased for exclusive occupancy to, and occupied by, a member of the corporation and the member’s immediate family under a proprietary lease.”  Units in mixed-use buildings and cooperative apartments may be eligible.  The following eligibility criteria apply to “certified historic structures”:

1. The property is individually listed in the National Register of Historic Places
2. The property is located in a historic district that is listed in the National Register of Historic Places
3. The property is designated as a historic property under local law and determined by the Director of the Maryland Historical Trust to be eligible for listing in the National Register of Historic Places
4. The property is located in a local historic district that the Director of the Maryland Historical Trust determines is eligible for listing in the National Register of Historic Places and is certified by the Director as contributing to the significance of the district

Application Process

Note: Please read the Homeowner Application Instructions and all supporting materials prior to beginning this process.

The application for homeowners is a 3-part process: 

• Part 1 certifies that a building is either a contributing resource to a historic district or is individually eligible;
• Part 2 certifies that a given scope of work meets the Secretary of Interiors Standards for Rehabilitation;
• Part 3 certifies that the actual completed work has met the Standards.

Approval of all plans must be received prior to starting work

The law governing the State tax credit program defines “qualified rehabilitation expenditures,” in part, as “any amount that is expended in compliance with a plan of proposed rehabilitation that has been approved by the [MHT] Director.” This provision of the law means that rehabilitation expenditures for work that is undertaken prior to the Director’s approval of the Part 2 are ineligible for tax credits.
Tax Credit applications requesting plan approval (Part 2) or final tax credit certification (Part 3) for rehabilitation projects that have been substantially completed prior to review and approval by the Director will be returned to the applicant without review.

Application Fee

The Application Fee for the review of Maryland Sustainable Communities Rehabilitation Tax Credit Homeowner Applications is 3% of the amount of the tax credit for which a single-family, owner-occupied rehabilitation would be eligible based on the greater of the estimated or final qualified expenditures for the rehabilitation project (effective July 1, 2011).**
The fee will be due and payable in two installments:

1. $10.00 at the time of the Part 2 Application submission; and
2. the remaining balance of the 3% amount to be submitted with and prior to MHT’s approval of the Part 3 Application.

**As authorized by changes to the Heritage Structure Rehabilitation Tax Credit Program passed by the Maryland General Assembly during its 2007 session, and signed into law by Governor Martin O’Malley.

Submittal of Receipts and Invoices

Beginning with Part 2 Homeowner Tax Credit Applications certified after July 1, 2008 (FY 2009), applicants will be required to submit receipts and invoices in the form of an Itemized Expense Spreadsheet with their Part 3 Application for eligible costs incurred during the 24-month project period for which tax credits are being claimed.  This documentation will be reviewed by Maryland Historical Trust tax credit staff as part of the review and final certification of tax credit projects.

Eligible Projects and Expenses

The Maryland Sustainable Communities Rehabilitation Tax Credit may be used for projects that “return a structure to a state of utility, through repair or alteration, which makes possible an efficient use while preserving those portions and features of the structure and its site and environment which make the structure and its site and environment historically, architecturally, or culturally significant."
Examples of eligible projects could include (but are not limited to):

• repairing historic windows and doors or replacing deteriorated features with compatible new materials
• repairing or replacing roofs
• repairs to framing or structural systems
• HVAC systems
• Costs for architectural, engineering, consultants’ services and exploratory demolition necessary to prepare the application
• Interior finishes

Projects that are primarily remodeling are not eligible to receive tax credits. (b) “Rehabilitation” does not include an alteration which is primarily remodeling.

An example of projects that MHT considers to be primarily remodeling is the replacement of non-historic bathrooms and/or kitchens and fixtures that are in good working condition. In these cases, existing bathrooms and kitchens are in good repair and utility and are replaced or upgraded for purely aesthetic or personal reasons (e.g., replacement of marble countertops with granite, oak cabinets with cherry, or a 4-burner gas range with a 6-burner range). As noted above, the overall purpose of the Maryland Sustainable Communities Rehabilitation Tax Credit Program is to “return a structure to a state of utility.” Many bathroom and kitchen replacement projects include no other work that would be considered rehabilitation. The MHT believes that remodeling of a functional space merely continues the utility of the space and does not “return” the structure to a state of utility. The work therefore does not qualify as rehabilitation work.  The replacement or installation of kitchen appliances is not eligible for the tax credit.

Projects described in a proposed plan of rehabilitation (Part 2 Application) and determined by MHT to be primarily remodeling will not qualify for the tax credit program. Projects that include appropriate reconstruction of severely deteriorated or inoperable spaces, including kitchens and bathrooms, will continue to be considered rehabilitation work and eligible for tax credits.

Standards & Requirements

The Maryland Sustainable Communities Rehabilitation Tax Credit Program allows homeowners to receive tax credits for both exterior and interior rehabilitation work on certified historic structures.  All rehabilitation work must meet the Secretary of the Interior’s Standards for Rehabilitation (36 CFR Part 67), which are Federal guidelines that provide assistance for the preservation and proper maintenance of eligible historic buildings.

What are the Secretary's of the Interior's Standards for Rehabilitation?

The Secretary of the Interior's Standards for Rehabilitation (frequently called "The Standards") are a list of ten basic philosophies and principles for how to repair, rehabilitate, and in some cases add on to historic buildings in a manner that is compatible with the historic features of the building.
The Standards are not overly specific and describe general approaches and decision-making rather than provide a check-list of "dos" and "don'ts". The Standards are broad partly because no two buildings are exactly alike, and each building has its own unique character-defining features, problems, and issues. The goals of individual property owners are unique as well. Some owners want to restore their home, some need to put on a new roof or repair their existing windows, and some want to make room for new family members or accommodate different needs. Each of these projects requires a slightly different approach, and so it is not practical to write specific guidelines that apply to all types of projects on all types of buildings in all parts of the State.
Instead, the Standards offer guidance on how to approach your rehabilitation project.

For example, Standard #6 states:

“Deteriorated historic features shall be repaired rather than replaced. Where the severity of deterioration requires replacement of a distinctive feature, the new feature shall match the old in design, color, texture, and other visual qualities and, where possible, materials. Replacement of missing features shall be substantiated by documentary, physical, or pictorial evidence.”

If your project involves repairs to/replacement of your windows, then Standard #6 requires you to repair your existing, historic windows whenever possible. If some of your windows are so deteriorated that they are damaged beyond repair, and you have provided sufficient documentation justifying the existing condition of the windows to MHT, then they may be replaced with new windows that are the same design and materials. If your existing windows are made of wood with six panes of glass in each sash, then the new windows should be made of wood with six panes of glass in each sash and should have details that are similar to the old ones. Replacing your old wooden windows with vinyl windows that are different from the existing one would generally not be eligible for tax credits.

Who do I contact?

For more information, please contact:

• Renée Novak, Preservation Officer, at 410-514-7620
• Melissa Archer, Preservation Officer, at 410-514-7688