How does one determine the value of an easement for purposes of calculating the deduction?
Updated February 21, 2008The value of a preservation easement for purposes of the federal tax deduction must be determined through a qualified appraisal, performed by a qualified appraiser. [Note: the 2006 reform legislation in this area sets new criteria for qualified appraisals and qualified appraisers. See our summary here. If there is a substantial record of sales of easements comparable to the donated easements (such as purchases pursuant to a governmental program), the fair market value of the donated easement is based on the sales prices of such comparable easements. If – as is more typical – no substantial record of market-based sales is available to use as a meaningful or valid comparison, the fair market value of a perpetual preservation 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. This “before-and-after” methodology measures the loss of market value resulting from the easement donation. Because there are a number of different types of preservation easements – and different contexts in which they are applied – their restrictions and impact on properties (and the resulting effect on market value) may differ significantly, depending on a number of related factors. In particular, those factors include: (1) the types of restrictions included in the easement; (2) the developmental potential of the property in question; and (3) the regulatory environment to which the property is subject. Other factors, such as whether other property owned by the donor will benefit from the easement, may also be relevant.
The types of restrictions of the easement may affect value, depending on the easement’s terms and conditions. As noted above, some easements may only regulate changes to the exterior elevations of historic properties (and even then, may expressly permit certain types of alterations). Other preservation easements may protect a wider range of significant historic or architectural features, including, for example, a structure’s natural setting or landscaping, and interior spaces and architectural features such as room configurations, mantels and moldings, lighting fixtures, ironwork, woodwork, and plasterwork. Still other easements may prohibit construction on double lots, prevent multiple parcels from being consolidated for greater development potential, or eliminate other development rights that may exist under local zoning. The more onerous the restrictions imposed by the easement, the greater the impact on property rights, and the larger the potential impact on fair market value.
The developmental potential of individual properties also affects value. An easement on a historic property in a remote rural area that is not subject to significant developmental pressures may have far less impact on value than a similarly situated property in a downtown business district, even if the downtown business district is subject to strict zoning or other types of development restrictions. Even within a major city, there are considerable variations in development potential, for example, as between a well-established residential area and a central business district or transitional neighborhood. Properties subject to greater developmental pressures will naturally be impacted more significantly by the imposition of a preservation easement. Easements on commercial properties or properties zoned for commercial use, in particular, can have a significant impact on rates of return, risk, operating expenses, and future development potential. (For commercial properties, these types of impacts are generally captured by easement appraisers under a valuation analysis that examines impacts on future income.)
The regulatory environment also has the capacity to affect an easement’s value. Many preservation easements are imposed on historic structures that are not subject to local historic preservation laws or other types of preservation controls, and in this situation the impact of an easement on a property’s market value may be significant. On the other hand, easements imposed on properties subject to strict local historic preservation laws may differ little from the restrictions imposed by those laws, and the impact of the easement, from a substantive standpoint, may be far less. However, not all preservation laws are created alike – the degree of local regulatory control may vary significantly from one state to another and even from one jurisdiction to another within a state – and the effect on valuation may be either minor or significant.
Useful guidance on the valuation of easements can be found in the publication Appraising Easements (Land Trust Alliance/National Trust for Historic Preservation, 3d Ed. 1999, p. 31).
