Office of Chief Counsel for the Internal Revenue Service Issues Memorandum Addressing the Valuation of Preservation Easements
| Posted: 2/22/2008
On September 21, 2007 the Office of Chief Counsel for the Internal Revenue Service released a memorandum addressing the valuation of preservation easements. The memorandum can be downloaded here or here.
IRS regulations have long made it clear that easement valuation depends on a number of factors, and that the value of easements is likely to vary from property to property and from easement to easement. Nevertheless, for many years some organizations and appraisers have stated or suggested that the proper valuation of a preservation easement should range from approximately 10-15 percent of the value of the property, based on statements included in an article by an IRS analyst previously posted on the IRS’s web site, and based on similar language used in audit guidance previously published by the IRS. These statements are no longer made in IRS publications, and in recent years the IRS has gone to great lengths to state that there is no generally recognized percentage for valuing easements. The Chief Counsel's memorandum is a pointed reminder that appraisers should not use these percentages as the basis for valuing easements.
The Office of Chief Counsel’s memorandum addresses whether a preservation easement appraisal that uses a “generally recognized” percentage to value an easement can be used to substantiate the value of a charitable deduction. It should come as no surprise that the memorandum clearly states that there are no generally recognized percentages for valuing easements and that appraisals of preservation easements must use either a comparable sales analysis or utilize the before and after approach to substantiate value.
The following are a few summarized points raised by the memorandum:
- Preservation easement appraisals must use one of the following valuation methodologies to substantiate a deduction:
- Comparable Sales: If there is a substantial record of sales of easements comparable to the donated easement, the fair market value of the donated easement should be based on the sales prices of those comparable easements.
- Before and After Analysis: If there is no substantial record of market-place sales of comparable easements, generally the fair market value of a perpetual conservation restriction should be determined based on the difference between the fair market value of the property before granting the restriction and the fair market value of the property after granting the restriction.
- The mechanical application of any valuation methodology, such as the use of generally recognized percentages to determine value, is an unacceptable approach to determining the value of a preservation easement.
- The before and after analysis must include an objective assessment of the likelihood that the property would be developed absent the restrictions contained in the easement.
- The before and after analysis must also include any effect from zoning, conservation, or historic preservation laws that already restrict the property’s potential highest and best use.
- There may be instances where an easement has no material effect on the value of property.
- Tax court cases do not establish a set percentage value for easements.
- The value of each easement must be based on the particular facts and circumstances of each property on which the easement is located and the particular restrictions imposed by the easement.
- Appraisals for preservation easements that do not use either a comparable sales analysis or a before and after analysis will not be accepted by the IRS to substantiate deductions under § 170h of the code.