A property owner seeking a Federal tax deduction for a conservation easement contribution (including a historic preservation easement) needs to be aware of several detailed requirements for the appraisal valuation, minimum features to be preserved, public access, and other considerations. Currently, the amount of a charitable income tax deduction for a conservation easement contribution that can be used by an individual in any one year is 30 per cent of the donor’s contribution base (or adjusted gross income). In addition, the period over which individuals can carry forward unused deductions for conservation easement contributions is five years.
The recipient of an easement donation must be a qualified organization, such as Easements Atlanta, Inc., which is a publicly supported 501(c)(3) charity. Easements Atlanta, Inc., provide a written agreement to the donor certifying that Easements Atlanta, is a qualified organization with a purpose of historic preservation, and that Easements Atlanta has the resources to manage and enforce the restriction and a commitment to do so. To assist us with our commitment, Easements Atlanta requires the easement donor make an additional donation of funds to help the organization administer the easement, called a stewardship fee. Those funds are held in an endowment that generates an annual income to pay for easement administration costs such as staff time for annual inspections or potential needed legal services.
In order to claim the Federal income tax deduction for a historic preservation easement, at least some visual public access to the property must be available. The degree of access is tailored to the historic resource under protection. For example, providing access may include ensuring visual access from a public roadway for a historic building and grounds subject to an exterior easement, or allowing the public to tour the inside of a historic house on a reasonable number of days a year if the easement is imposed on portions of the interior. Often the easement-holding organization can assist the owner in finding a balance between protecting the property and the owner’s privacy, and providing a public benefit.
Additionally, a building in a registered historic district must now preserve the entire exterior of the building (including the front, sides, rear and height of the building), and the easement must prohibit any change to the exterior of the building inconsistent with its historic character. building exterior does not apply to an easement on a property that is individually listed in the National Register of Historic Places. As in the past, easements on properties individually listed in the National Register of Historic Places can cover part(s) of a building, such as the front façade, primary facades facing a public street, a front façade along with an important interior space, or the entire exterior. However, like most easement-holding organizations, Easements Atlanta, Inc., requires that the entire exterior of a building be covered by the easement’s protections.
To be a qualified appraiser, the appraiser has to have verifiable education and experience in valuing historic properties, must not be prohibited from practicing before the IRS, and must meet several other requirements established by the IRS. In addition, certain appraiser declarations are required. Easements Atlanta maintains a list of appraisers within the Metro Atlanta area specializing in preservation easements and is available upon request.
Easement valuations have come under closer scrutiny by Congress and the IRS in recent years, and the Federal tax code imposes new qualification standards for both appraisals and appraisers. For example, the appraisal must be prepared in accordance with generally accepted appraisal standards. The amount of a contribution deduction for a perpetual preservation or conservation easement generally is the fair market value of the easement at the time of the contribution. The most commonly-used method of determining this value is usually referred to as the “before” and “after” method: Generally the fair market value of an easement is equal to the difference between the fair market value of the property before the granting of the easement and the fair market value of the property after the granting of the easement.
Treasury Regulations governing valuation of conservation easements (§ 1.170A-14(h)(3)(ii)) provide that, if the before and after valuation method is used, the market value of the property before the contribution must take into account not only the property’s current use but also an objective assessment of the likelihood that the property would be developed absent the restrictions, as well as any effect from local zoning, local historic preservation regulations, and similar restrictions that affect the property’s highest and best use. Donors and appraisers should be aware that there are strict penalties for overvaluations of property that lead to substantial or gross valuation misstatements.
Note that there are no generally recognized percentages by which an easement reduces the value of a property. In fact, there are instances in which the grant of an easement may have no material effect on the value of the property, particularly if the easement is no more restrictive than local ordinances already in effect.
In the case of a preservation easement donation for which a deduction of more than $5,000 is claimed, a donor must obtain a qualified appraisal prepared by a qualified appraiser. The appraisal must be attached to the donor’s tax return for any claimed deduction over $500,000. To deduct the value of an easement on a building in a registered historic district, an appraisal must be attached to the tax return regardless of the amount of the claimed deduction.
In the case of a claimed deduction of $250 or more, the donor must obtain a contemporaneous written acknowledgement as required by section 170(f)(8) of the Internal Revenue Code. This means that the donor needs to obtain from the easement holding organization a document stating the amount of any cash it received (such as the stewardship fee) and a description of any property it received (such as the preservation easement). The organization must also state whether it provided any goods or services in return for the property and, if so, a description of the goods or services. The donor must obtain this contemporaneous written acknowledgement on or before the earlier of the date the donor files the tax return claiming the charitable contribution or the due date (including extensions) for the tax return.
For easement donations that involve buildings within historic districts where a deduction in excess of $10,000 is being claimed, the donor must submit a $500 filing fee with IRS Form 8283-V. In addition, in all cases in which a deduction of more than $500 is claimed, a properly completed IRS Form 8283 (Noncash Charitable Contributions) must accompany the donor’s tax return. For contributions for which a deduction of more than $5,000 is claimed, the Form 8283 must be signed by the appraiser who prepared the qualified appraisal and by the qualified organization that accepted the easement donation. In addition to the above requirements, the donor of a preservation easement on a building in a registered historic district must include with his or her tax return photographs of the entire exterior of the building and a description of all restrictions on the development of the building.
A property owner conveying an easement on an historic building that has or will be rehabilitated may also be eligible for a 20% tax credit under the Federal Historic Rehabilitation Tax Incentives Program. This credit is available for properties rehabilitated for income-producing properties, but it is not available for properties used exclusively as the owner’s private residence. The rehabilitation must be substantial as defined by IRS and applies only to a project that the National Park Service designates as a certified rehabilitation. In cases where the donor may qualify for both a Federal income tax deduction and a rehabilitation tax credit, there are two important considerations: First, an easement placed on a building that is the source of a rehabilitation tax credit may be considered a partial disposition of the building, which could affect the available tax credits. Second, where rehabilitation tax credits have been claimed within 5 years preceding the easement donation, the Internal Revenue Code requires some reduction in the amount of the easement contribution deduction. An accountant or tax attorney should be consulted in such cases.