Historic house could also be a tax shelter, but look it over first
There's a big problem with many tax shelters: They might not provide real shelter. After you've invested in one, you may have to wait for a tax court to tell you if the deduction was legitimate. And last year's Tax Equity and Fiscal Responsibility Act, which tightened the rules on tax shelters, made it even tougher to find an effective shelter.
But there is one tax shelter that is doing very nicely, thanks to the tax law passed a year earlier. The Economic Recovery Tax Act of 1981 (ERTA) specifically provided that 25 percent of the money invested in the renovation of historic buildings - those at least 40 years old and listed on the National Park Service's National Register of Historic Places - could be immediately written off as a tax credit. Structures that are 30 to 40 years old get a 20 percent credit; if they are just 30 years old, they qualify for a 15 percent credit.
With ERTA's help, the number of historic projects given tax credits jumped from just over 500 in 1980 to over 1,700 last year. In this fiscal year (starting last Oct. 1), the National Trust for Historic Preservation expects there will be some 2,750 projects, representing an investment of $1.5 billion, up from $1.1 billion last year and $738 million in fiscal 1981.
Actually, the first - though more limited - preservation tax incentives became available in 1976. Since then, over $3.4 billion in private money has been invested in renovating historic buildings, according to the Park Service.
So far, investing in the rehabilitation of these old buildings has been limited to affluent individuals who have the money to buy a building and restore it or to those who can be part of a small group doing this work.
However, several brokerages, real estate developers, and architectural firms have begun putting together partnerships that will let people have a piece of these rehabilitation projects without investing the hundreds of thousands or millions of dollars needed to become a full partner.
One of these firms is Sovereign Realty, a division of Butcher & Singer Inc., a Philadelphia brokerage. By the end of this year Sovereign expects to raise some $75 million through private, limited partnerships for the restoration of buildings in locations like Philadelphia, Allentown, Pa., Chicago, St. Louis, and Hartford, Conn.
In Philadelphia, for example, a former YMCA building is being turned into 126 luxury apartments, a $10.3 million project. Last year, in a $34.5 million project, a five-building complex that had been part of Chicago's printing industry was turned into housing and office space.
Sovereign's program is limited to upper-income people, specifically those in the 50 percent tax bracket, says Ray Albert, the firm's director of marketing. Of the projects Sovereign has offered so far, the smallest initial investment was $54,500; the largest, $185,000. Prospective investors must complete a form proving they have the resources to afford this large an investment. For those who can qualify, there are good rewards. For one thing, every dollar put in will yield $1.75 to $2.25 in deductions and investment tax credits.
Beyond that, most investors would be in these projects for a few years at least, qualifying any profits for long-term capital gains tax treatment.
To give investors a good capital gain, the sites must be selected carefully, advises Fuhrman Nettles, director of research at Robert A. Stanger & Co., which publishes the Stanger Report, a newsletter on tax shelters.
A building may be old and it may be a landmark, Mr. Nettles points out. It may also be listed on the National Register. But that does not mean it is necessarily attractive to prospective tenants. An old factory being turned into condominiums, for instance, may not be in a location that is attractive enough to bring in the prices expected by the developer.
Mr. Nettles suggests investors check carefully into any renovation projects the developers and the brokers have done before, where they were located, and what kind of return they experienced. Investors should remember, he adds, that these projects are to be considered for their tax benefits and long-term gain, not current income. ''This is a tax benefit, not an income generator,'' he says.
Eventually, Sovereign's Mr. Albert predicts, large brokerages like Merrill Lynch & Co. will begin offering rehabilitation investment programs to people of more modest means, where they will only have to put up $1,500 to $2,000. But many of the same rules regarding careful checking into the developer's or broker's experience will apply.
Should investing in historic buildings get too popular, Mr. Nettles adds, it will create another problem, that of too much money chasing too few buildings. ''There are only so many national monuments,'' he points out. But with careful selection, aided by a genuine interest in the preservation of some of America's finer old buildings, this can prove a worthwhile investment, as well as an indisputable tax shelter.