What are the federal tax benefits for an easement donation?Updated 2/21/2008
NOTE: The complexities of the federal tax code and the applicable IRS regulations are not easily encapsulated in a short summary, so prospective donors are strongly advised to seek the advice and assistance of an attorney with experience in such matters.
Potential donors, attorneys, and preservation organizations should also be aware the Congress recently passed legislation, which the President signed into law on August 17, 2006, that changes certain provisions of the law relating to federal tax benefits for donations of easements on historic properties. Please see this summary for additional information.
Since the issuance of a revenue ruling in 1964, taxpayers have been able to take charitable contribution deductions for federal income, estate, and gift tax purposes on the value of a conservation easement (including a preservation easement) donated to a qualified charity or public agency. This tax benefit was formalized by Congress in 1976, in recognition of the important public benefits conferred through donated easements. In subsequent years, new provisions have been incorporated into the tax code which set forth specific eligibility requirements.
Copies of the federal tax code governing the deduction of easement donations (26 U.S.C. § 170(h) and the applicable IRS regulations (26 C.F.R. § 1.170A–14) are available in PDF form: the tax code provisions (including recent revisions passed by Congress and signed into law by the President); and the IRS Regulations.
Under Section 170(h) of the tax code, a donor of a qualified conservation easement is entitled to a charitable contribution deduction in the amount of the appraised value of the donated easement. The deduction has generally been limited to 30 percent of a taxpayer’s contribution base for the year in which the donation is made (adjusted gross income less any net operating loss carrybacks), with any excess allowed to be carried over for up to five additional years. The President recently signed Public Law 109-280, extending these allowances for donations made in tax years beginning in 2006 and 2007 to 50 percent of a taxpayer’s contribution base for the year of the donation, with a 15 year carryover. (Different deduction limitations apply to taxpayers who use a cost basis for determining the value of their property, most commonly for those who donate an easement within a year after purchasing a property. Different deduction limitations may also apply in the case of farmers or ranchers. Donors should check with their tax advisors for specific information.)
A charitable contribution is considered to be made for a conservation or preservation purpose if it protects land areas for outdoor recreation or for the education of the general public, natural environmental systems (including fish, wildlife, or plant habitat), open space (including farmland and forest land, or land protected for the scenic enjoyment of the public) where such preservation will yield a significant public benefit, or a certified historic structure or historically important land area.
A “certified historic structure” is a building, structure, or land area that is individually listed by the National Park Service on the National Register of Historic Places or a building (but not a structure or land area) located in a National Register historic district and certified by the Secretary of the Interior as contributing to the historic significance to the district. (The term also applies to buildings included in registered local historic districts that have been certified by the Secretary of the Interior as meeting the same general qualifications of a National Register district, so long as the building in question is also certified as contributing to the district. However, a building designated as an individual landmark at the local level will not qualify unless the landmark is also listed on the National Register.) The donation of an easement over a "historically important land area" includes land that is either independently significant (such as a Civil War battlefield) and substantially meets National Register criteria for evaluation or is adjacent to (and contributes to the integrity of) a property listed on the National Register of Historic Places.
To qualify for the tax deduction, easements must first meet the requirements of state law, including the applicable requirements of state law authorizing the granting of easements, and they must be enforceable. In addition, easements must meet a number of requirements imposed by federal tax law. For example, the easement must be maintained in perpetuity. To avoid extinguishment of the easement deed in the event of foreclosure, the rights of mortgagors must be carefully set out and made secondary (“subrogated,” in legal terms) to the interest of the easement-holding organization. If the easement is ever extinguished (for example, if the historic building is destroyed by fire and not reconstructed), the holder of the preservation easement must be entitled to receive the value represented by the preservation easement (i.e. the same percentage that the value of the easement at the time of the donation bears to the full fair market value of the property). This percentage remains constant over the duration of the easement. Under the IRS regulations, extinguishment must be accomplished by judicial action. Easements may only be assigned or transferred to an organization that also meets the requirements of a qualified organization under the tax code, and the conservation purposes must continue to be carried out.
The IRS regulations also require that a preservation easement must provide reasonable visual access to a historic property. When a historic structure or land area is not visible from a public way, specific steps must be taken to ensure that the public has the opportunity to view the property preserved by the easement “to the extent consistent with the nature and condition of the property.” IRS regulations provide some guidance on the level of access that should be provided to satisfy public access requirements. The degree and nature of access may vary, depending upon a range of factors including: the historical significance of the property; the features that are the subject of the easement; the remoteness or accessibility of the site; the possibility of physical hazards to the public when visiting the site; the extent to which visitation would pose an “unreasonable intrusion” on privacy; the degree to which visitation would impair preservation objectives; and the availability of alternative means to view the property apart from physical access.
In addition to the income tax deduction, federal estate taxes may also be reduced if the fair market value of a property is reduced by a preservation easement.
New legislation signed into law by the President on August 17, 2006 imposes new "special rules" limited deductions for easements on buildings in registered historic districts, for example, requiring that the easement protects the entire structure (i.e. not just one or several façades), prohibits changes inconsistent with the historic character of the building, imposes a new requirement for new certifications by the donor and donee under penalty of perjury, and imposes new substantiation requirements.