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Historic Preservation Tax Credits Notes
Two types:
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Non-income producing. 40% North Carolina tax credit.
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The tax credit is calculated by multiplying 40% tgimes the qualified rehabilitation expenses, or
QRE's. The tax credit amount will be slightly less than 40% of the purchase amount because
some of the construction expense is a non-qualified rehabilitation expense, or non-QRE's.
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This tax credit applies to those who plan to use the unit for personal use as thir own primary or
secondary home. A unit is "non-income" producing if the owner does not receive rent for the unit. A
unit can be non-income producing if you own the unit but someone else lives there but does not pay
rent; for example, your child or parent.
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The NC tax credit is deducted from your NC income tax liability beginning in the year of purchase.
The total credit is taken in 5 installments over a 5 year period. If you are unable to use all of the
credit in 5 years, you may extend it for up to 10 years. Ten years after the purchase date, the unused
tax credits expire.
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You may jointly own a unit with a lower income child or parent; for example, you may own 1% of the
unit and receive 100% of the tax credit.
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Transferability. The tax credits are non-transferable. The first buyer receives the entire tax credit. You
may sell the unit any time after the initial purchase, but all the unused tax credits stay with you, the
original buyer. For example, if you sell the unit after only one year of ownership and you have used only
your first installment of the tax credits (1/5 of the total credit for the first year), you will continue taking
the unused tax credits for the remaining 4 years (or up to 9 more years if needed), even though you no
longer own the unit.
- There is no recapture of the tax credits when you sell the unit, regardless of the date of resell.
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The recent Economic Stimulus Plan appears to allow for an additional Federal income tax credit of
$8,000 for qualified buyers of non-income units.
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Income producing. 40% North Carolina tax credit, plus a 20% Federal tax credit.
- The NC credit is applies just like the example above.
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The Federal credit is an additional credit and has different terms.
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The Federal credit is applies against your Federal tax liability, but unlike the NC credit, you
need to have some rental income subject to Federal income tax. This rental income includes
any rental income from the condominium.
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The Federal tax credit is applied against Federal income tax paid in the year before you
purchased the condominium. You would amend your return for the prior year and request a
refund for up to the full amount of the Federal tax credit. In other words, if you paid enough
Federal income tax in the year before the condominium purchase, you would receive a tax
refund up to the full amount of the Federal tax credit.
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The Federal credit carries one year back and 20 years forward. Use all you can each year until
the entire credit is used up. After 20 years, the Federal tax credit expires.
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You need to hold the property for a 5 year period to avoid repayment penalties. For example, if
you take all of the Federal tax credit in the first year and you sell the condominium on year 4,
you must repay 1/5 of the Federal tax credit. This is the portion of the tax credit that would have
applied to year 5 but was taken early.
Below is a partial list of qualified and non-qualified expenses:
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Outside decks and patios
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No
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Appliances
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No
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Custom counter tops (granite,etc.)
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Yes
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Ceramic tile, linoleum
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Yes
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Light Fixtures
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Yes
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Security system
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Yes
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Extra dead bolt locks
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Yes
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Jacuzzi, custom tub
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Yes
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Plumbing fixture upgrade
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Yes
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Wallpaper
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Yes
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Special moldings
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Yes
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Built in shelving
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Yes
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Mini blinds, curtains
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No
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Cabinets (must be custom)
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Yes
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Custom bookcases
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Yes
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Painting special colors
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Yes
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Heat pump upgrades
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Yes
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Inside parking spaces
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Yes
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Attached kitchen island
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Yes
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Roll around kitchen island
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No
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Custom pocket doors
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Yes
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