Tax Benefits & Grants
Mills Act Property Tax benefit Summary of program
Mill’s Act Property Tax Assessment
For San Clemente “Designated Historic Properties”
In 1972, the State passed the Mill’s Act. In November, 1997 the City of San Clemente adopted the Act. The Mill’s Act allows owners of designated historic properties to apply for a property tax reduction. The resulting Historic Property Preservation Agreement may give them a significant tax savings, especially if the purchase was in the past seven to ten years, because values have shot up. Although the savings can be substantial, some owners fear it might be too restrictive and others don’t know it is available or haven’t taken the time to apply. There are a number of false rumors circulating. Here are the facts:
The City will accept 5 applications per quarter for the first three quarters in the year. All applications get forwarded to the county at year’s end for assessment in January. Adjustments are notified in July for the December billings.
The City wants to make sure that the property will maintain its integrity as a historic structure. Therefore, the City may request restoration, restrictions or requirements for a building to enter a Mill’s Act contract. As part of the application process, the owner/applicant will meet with the City planning department at the property to discuss possible alterations the owner or the planning department may have in mind. Mostly, the city is concerned with elements which can be seen by the public from the street, which is a good idea for everybody. For example, if you add on a bedroom or second story, the city will require that the roof be made with two-piece Spanish clay tiles. If you have aluminum windows that face the street, the city may ask that you replace them with wood windows. When all parties agree to suggested alterations, then the Mills Act application goes forward. The owner is usually allowed between one to ten years to complete any agreed-upon restorations. After a meeting of the City Council, the HPPA agreement is recorded. The city then sends the paperwork to the county of Orange assessors.
The County calculates property value based on the income approach using MLS data for presumed rental income and a basic percentage of income for allowable expenses. There is a complicated calculation to arrive at the Mill’s Act value. The tax will be assessed at the lower of the Prop 13 rate (~1% of the purchase price) or ~1% of the Mills Act value. Savings can be quite significant especially in the first few years. As rental values increase the tax may rise (it could rise faster than the 2% maximum/yr. for non- Mill’s act properties). The contract runs ten years and is renewed annually automatically. The benefit transfers with the sale, as do any required unfinished restorations. There are penalties for non-compliance with agreements.
There are no restrictions to building additions or making alterations to the property except for keeping the existing style and following city codes. Properties that are partially historic and partially new construction may get assessed with partial Mills Act treatment. Building permits and cultural heritage permits may be required as usual by the City.
For more information on the application process, regulations and estimated tax calculations, please call Dena Van Slyke, the historic property specialist.
Grants are available too. Let me know if you own an "Ole" and need more information or if you are interested in this. Grants are basically for renovations and are mostly granted to those in financial need. Write to me and I'll tell you more.
There is a new law I just found out about that lets owners of historic commercial properties get a credit for renovations they make to their homes. Call me or email to me if you are interested in speaking to a tax professional about this at no charge.
20% REHABILITATION TAX CREDIT
Preservation Tax Incentives for Historic Buildings
Tax credits provide an important tool in the rehabilitation of historic properties. This federal program provides a dollar-for-dollar income tax reduction credit equal to 20% of qualified rehabilitation expenditures on income producing properties that are certified historic structures. Certified historic structures are either individually listed in the National Register of Historic Places (NRHP), or are contributors to a NRHP District. Properties not yet listed may apply for a preliminary determination of eligibility by filing a Part 1 form.
The property must be rehabilitated following the Secretary of the Interior’s Standards for Rehabilitation (1990). The project costs must exceed either $5000 or the adjusted basis of the building, whichever is higher. For larger projects, developers typically enter into a partnership with “tax credit investors” to more efficiently use the tax credit benefits. The developer serves as general partner with the tax credit investor being a limited partner, making an equity contribution to the project in exchange for the tax credit benefits. Under certain circumstances, non-profit organizations may also enter into such a partnership to allow their projects to benefit from the tax credit.
This is one of the most successful and cost-effective community revitalization programs which also attracts private investment in the historic cores of cities and towns. New jobs, enhanced property values, urban renewal, new municipal revenues, improved properties, and a lively, diverse and attractive community are other benefits realized from completed projects.
PROGRAM GUIDELINES
The Tax Incentives program is implemented by federal regulations under 36 CFR Part 67 and is a three-way partnership between the local state Office of Historic Preservation (SHPO), the National Park Service (NPS), and the Internal Revenue Service (IRS):
SHPO
NPS
IRS
First point of contact
Provides forms, regulations, and other information
Maintains records of State’s National Register properties
Processes forms for listing
Assists with information on appropriate rehabilitation treatments and materials
Assists with tax credit applications and sends project review to NPS
Processes program fees
Reviews all applications for conformance with the Standards
Issues all certifications (approval or denial) in writing to owner
Transmits copies of documents to the IRS
Develops and publishes program regulations, the Standards, other publications and maintains a web-site
Publishes regulations governing which rehabilitation expenses qualify for credits
Sets time periods for incurring expenses
Has procedural and legal oversight for claiming 20% and 10% credits
Publishes audit guide for financial and legal aspects
Insures that only qualified parties claim the credits
Federal Incentives - 6
APPLICATION
- Contact the SHPO for forms and to determine whether your property is National Register eligible. Forms and information may be downloaded from the NPS website or the CA SHPO website link.
- File a Part 1 (Evaluation of Significance) to start the program (individually listed properties do not need to file a Part 1, unless the listing consists of more than one building. Photos and a location map are important components of the application.
- File the Part 2 (Description of Rehabilitation Work) to clearly describe all the project work and how historic fabric might be affected. One of the most critical parts of the Part 2 is photos of “before” conditions so the NPS may compare the building before and after work. Lack of such photos can result in denial of the project, as review cannot be completed without them. Drawings should accompany the Part 2 application.
- File the Part 3 (Request for Certification of Completed Work) after work is completed. Include photos of completed work, taken from the same locations as “before” photos. When filing the Part 3 be sure to contact your accountant or financial advisor for the details of claiming the credit. In certain instances, alternative minimum taxes and passive activity limitations may limit the use of the rehabilitation tax credits.
- All submissions should be submitted in duplicate form. OHP retains one original copy and forwards the second original copy to NPS.
- Most tax incentive rehabilitation projects are completed in a two-year cycle and the credits are claimed when the Part 3 is filed. For complex projects, or those with complex financing, it is possible to request a five-year, phased program. This must be done at the time the Part 2 is filed and must be accompanied by a detailed explanation of the phases. Credits may be taken in increments during the five-year period by filing a Continuation Sheet explaining the completion of a work phase. It is important to be aware that the whole project is reviewed, and later work if not done in accordance with the Standards, may result in denial.
