For a preservation easement donation to be considered a non-cash charitable contribution, a lot rides on the appraiser and their appraisal document. The appraisal may arguably be the most important document examined by the Internal Revenue Service during a review of a claimed contribution of a preservation easement donation on your Federal tax forms. Therefore, it’s absolutely critical that appraisals be done by competent appraisers who thoroughly understand the very complicated process of valuing a preservation easement.
The determination as to whether an appraiser is properly licensed is simple and objective; however, the determination as to whether an appraiser “demonstrates verifiable education and experience valuing the type of property subject to the appraisal” is more complex and subjective. The qualified appraiser needs significant experience appraising properties in a particular geographic area to meet the standards required by the Internal Revenue Code. Therefore, when joining Easements Atlanta, Inc. (EAI) as their new executive director, I became curious about how many appraisers in Metro Atlanta understood the methodology of one of the most difficult types of valuations – preservation (a.k.a. conservation) easements. I reached out to the Appraisal Institute, the national professional association for appraisers, and through them found nine appraisers out of about 500 in Metro Atlanta that specialize in easement valuations of historic properties. It became clear this was a very small niche in the larger arena of appraisals.
The Internal Revenue Code and the related Treasury Regulations impose a number of substantiation requirements associated with a qualified appraisal. Preservation easements are generally valued by viewing the value of the easement before and after the easement is placed on the property, and the value of the deduction is the difference between these two values. The qualified appraisal will show the fair market value of the affected property before and after the historic preservation restriction is imposed which will be used to calculate the federal tax deduction; is prepared by a qualified appraiser no earlier than 60 days before the contribution date and no later than the extended due date of the income tax return first claiming the deduction; and must include the following information:
- A detailed description of the property.
- The property’s physical condition (for a contribution of tangible property).
- The date or expected date of the contribution.
- The terms of any agreement relating to the property’s use, sale or other disposition.
- The appraiser’s name, address, and taxpayer identification number, and that of the appraiser’s employer or partnership.
- The qualifications of the appraiser, including the appraiser’s background experience, education and membership in professional appraisal associations.
- A statement that the appraisal was prepared for income tax purposes.
- The date the property was appraised.
- The appraised fair market value of the property on the date or expected date of the contribution.
- The method of valuation used to determine the fair market value.
- The specific basis for the valuation (such as specific comparable sales transactions or statistical sampling).
An appraiser who satisfies these requirements will comply with the Treasury Regulations and this will provide a basis for which the valuation of the preservation easement may be accepted by the Internal Revenue Service. The fair market value of a preservation easement is an important feature to a property owner considering the donation to a qualified organization such as EAI. Unacceptable appraisals not only damage the integrity of the particular easement transaction, they also betray public trust in and support of historic preservation in general. EAI helps ensure that donors have the most sound preservation easement transactions possible by recommending that a qualified appraiser be hired to decrease the chance of a poorly drafted appraisal.