Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: I’m thinking of buying a historic home in California. Can you explain how the Mills Act tax abatement program works?
A: The Mills Act Program is a state law that allows “local governments to reduce property taxes on historic properties in exchange for the preservation and rehabilitation of those properties,” said Patrick Perry, a partner at the California law firm Allen Matkins.
Although it is a state program enacted in 1972, local governments establish their own rules to determine which properties are selected, according to the California Office of Historic Preservation. Application procedures, contract terms and specific criteria vary throughout the state, and participants could see property tax savings of between 40% and 60% each year.
Regardless of location, only qualified historic properties qualify for the abatement, Mr. Perry said. These have been deemed as such by the local, state or national government, and have some sort of significance as places where a well-known event occurred, a notable person lived or are examples of an important architectural style. If a property doesn’t yet qualify, owners can apply to have it designated and then apply for a Mills Act contract.
The application process can be complicated because local governments want to make sure the money that’s not being paid in taxes is going into the preservation or rehabilitation of the property.
“There’s a tension between wanting to preserve historic properties and also wanting to maintain the tax base,” Mr. Perry said.
Applications generally require detailed descriptions of the preservation or rehabilitation work that’s going to be done, photographs, budgets and other materials. They are accepted on an annual basis, and then evaluated by the local governments.
When a property is selected for the tax abatement, there’s a 10-year contract between the homeowners and the government, Mr. Perry said. Both residential and commercial properties are eligible. If a property is sold, the contract transfers to the new owner.
Some jurisdictions put caps on how much a property can be worth in order to get the credit, which is often around $1 million or $1.5 million, Mr. Perry said. Exemptions are given, however, for higher-priced properties, although there is often additional scrutiny of the property.
Additionally, places like Los Angeles’ downtown historic district are exempt from the caps.
Matthew Burke, a California property tax lawyer, said that many of the old renovated lofts downtown qualify for the tax abatement.
Because different jurisdictions each negotiate the Mills Act contracts differently, homeowners should contact their local officials to inquire about the abatement. The Office of Historic Preservation provides local contacts in many regions on its website.
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