Preservation Easements
An Important Legal Tool for the Preservation of Historic Places
Owners of historic properties devote considerable time, effort, and expense to restoring and maintaining the architectural details and historic character of their properties. Preservation-minded owners often worry that their properties will not be properly protected and maintained in the future by subsequent owners. Likewise, preservation organizations have a strong interest in ensuring the long term protection of the many thousands of historic properties that remain in active private use, whether a nationally-significant landmark, a rural village, a cultural landscape, or farmland.
Reynolds
Tavern, an important 18th Century landmark in Annapolis, MD, is protected
by an exterior easement held by the Maryland Historical Trust, and an interior
easement held by the Historic Annapolis Foundation. Once owned by the National
Trust, the property is now a privately-owned restaurant and bed & breakfast.
(NTHP photo)
For property owners looking to permanently protect their historic properties, one of the most effective legal tools available is the preservation easement – a private legal interest conveyed by a property owner to a preservation organization or to a government entity. The decision to donate a preservation easement is almost always voluntary, but, once made, it binds both the current owner and future owners to protect the historic character of the property subject to the easement. Preservation easements have been used to protect a wide range of historic properties across the country – from New England Cape Cod cottages to Southwestern archaeological sites, and from Kentucky horse farms to mid-twentieth century Modernist houses in California. While some easements are for a period of years, in most instances easements are created as permanent restrictions.
Preservation easements have become an important component of state and federal policy to encourage public participation in the preservation of America’s historic resources. Indeed, their use is specifically encouraged by an important economic incentive: property owners who donate qualified preservation easements to qualified easement-holding organizations may be eligible for a charitable contribution deduction from their federal income taxes for the value of the historic preservation easement – provided that the contribution meets the standards of the Internal Revenue Service (IRS).
For more information on preservation easements, click on a subject below.
Please note that the information provided here is intended to convey general guidance; because easements are legal tools defined by state law (and affected by federal law, if federal tax incentives are sought), the advice and assistance of a knowledgeable lawyer or other professional should be sought.
- What is a preservation easement?
- Are preservation easements the same as façade easements?
- Who may accept or “hold” a preservation easement?
- Does the National Trust hold easements? Is it actively accepting easement donations?
- In the past, I’ve seen easement promotions from the "National Architectural Trust?" Is that organization related to the National Trust?
- Does the National Trust have sample easement documents?
- What is easement “baseline documentation?”
- Are fees charged by easement-holding organizations? What is a “stewardship fee?” Are there other costs to the donor?
- What are the federal tax benefits for an easement donation?
- Are there tax benefits at the state level as well?
- How does one determine the value of an easement for purposes of calculating the deduction?
- I’ve heard that IRS guidelines state that façade easements are worth 10-15 percent of the value of a particular property . . . is this true?
- My property is already protected against changes by future owners through a local preservation law . . . wouldn’t an easement be redundant?
- I’ve recently been solicited to make an easement donation . . . what do I need to know?
- I’ve heard that easements are starting to come under greater scrutiny by the IRS . . . should I be concerned?
- Where can I get more information about preservation easements?
What is a preservation easement?
The term “preservation easement” is commonly used to describe a type of conservation easement – a private legal right given by the owner of a property to a qualified nonprofit organization or governmental entity for the purpose of protecting a property’s conservation and preservation values. Conservation easements are used to protect land that has outdoor recreational value, natural environmental value (including natural habitat), open space (including farmland, forest land, and land with scenic value), or land that has historic, architectural, or archaeological significance. Preservation easements are conservation easements whose principal purpose is to protect a property with historic, architectural, or archaeological significance, although the easement may also protect natural land values as part of a property’s historic setting. (Correspondingly, other types of conservation easements held by conservation organizations or land trusts typically are given for the purpose of protecting natural characteristics of a property, but they may also protect historic resources, such as historic farmland or archaeological sites.)
A preservation easement is considered a “partial interest” in real property – the property owner continues to own the property but transfers the specific set of rights represented by the easement to the easement-holding organization. Typically, a preservation easement protects against changes to a property that would be inconsistent with the preservation of the property, such as demolition of historic buildings, inappropriate alterations, or subdivision of land. The easement may also protect against deterioration by imposing affirmative maintenance obligations. The restrictions of the easement are generally incorporated into a recordable preservation easement deed that is part of the property’s title (in legal terms, it “runs with the land”) – and this title interest is binding both on the present owner and future owners.
Preservation easements may be described in some states as “preservation covenants” or “preservation restrictions.” Although the terminology may vary, the interest conveyed is generally the same.
Conservation and preservation easements are created under state law – most states have specific enabling laws that authorize the creation of conservation and preservation easements as discrete interests in real property. The terms (and the requirements) of an easement may vary depending on the laws of a particular state – and, as such, it is important that property owners considering donating an easement, and that organizations considering accepting an easement, work with a lawyer familiar with the laws of the state in which the property in question is located. In some states, for example, state and local approval must be obtained before an easement will be deemed valid under state law.
Even though preservation easements are created under state law, easement donors seeking federal tax incentives will need to meet the requirements of the IRS regulations. Easements that do not comply with these additional requirements may be fully effective as easements, but may not qualify for the federal tax deduction. The IRS requirements are summarized below, but, again, donors are strongly advised to work with a lawyer familiar with the requirements of federal law.
The duration of preservation easements may differ. Some easements are for a term of years, with the interests of the preservation organization expiring at the end of the term. A common example is an easement that is imposed as a condition for a grant of financial assistance from a state or governmental authority or a nonprofit organization. Most easements, however, are written to last permanently. Easements that qualify for the federal tax deduction must be perpetual.
Typically, preservation easements address five basic issues: (1) What physical features of the property are covered by the easement; (2) What activities by a property owner that could damage or destroy significant historic or architectural features are absolutely prohibited; (3) What activities are allowed, subject to the approval of the easement-holding organization; (4) What activities are permitted by the owner as a matter of right; and (5) what type of affirmative maintenance obligations are required to be undertaken by the owner. The easement will also address other “boilerplate” issues, such as insurance, public access, amendment, and casualty damage.
There are many kinds of historic properties – and easements are as varied as the properties they protect. Most preservation easements protect, at the very least, the exterior character-defining features of a historic property, but many go beyond this to include interior features, the historic setting of a property, and/or specific landscape features. Most easements restrict the owner’s use of development rights such as subdivision or air rights. Some allow the owner to exercise those rights, but only as approved by the easement-holding organization. Some prohibit additions or construction of secondary structures; others permit them if approved as compatible with the historic character of a building.
The criteria used by preservation organizations in deciding upon the appropriateness of changes proposed by property owners may vary, but many organizations rely on the Secretary of the Interior’s Standards for Rehabilitation or the Secretary of the Interior’s Standards for the Treatment of Historic Properties. Some organizations follow the criteria established by a local historic preservation commission for review of changes to historic properties in a designated historic district under local law.
An easement is a relatively flexible tool. It can be crafted to meet the specific characteristics of the property, the interests of the easement-holding organization, and the property owner’s interest in having a property that will continue to have a viable productive use.
The obligations of an easement run in two directions: the owner of the property has the obligation to comply with the terms of the easement, and the easement-holding organization has the obligation to monitor and enforce the easement. From the standpoint of the easement-holding organization, the substantive benefits of preservation easements can greatly advance its preservation mission. On the other hand, easements may require a significant commitment of staff time and resources into the indefinite future, and they should not be undertaken lightly.
Are preservation easements the same as façade easements?
The term “façade easement” is sometimes used to describe a type of preservation easement that only protects the exterior façades (the “face”) of a historic structure. Typically, the term refers to easements for properties in urban environments – by comparison, exterior easements in a rural setting often cover not only exterior “façades,” but also the general setting and landscape around a historic structure. Many preservation organizations do not use the phrase “façade easement” because it implies that changes to the historic setting or to other aspects of the property are not covered by the easement even if they may affect its historic character.
Who may accept or “hold” a preservation easement?
The qualifications for an easement-holding organization are generally defined under state law. In addition, easements designed to qualify for the federal tax deduction must meet qualifications established by the federal tax code and regulations.
Generally conservation and preservation easements are held either by governmental entities (such as state historic preservation offices or local historic preservation commissions) or by nonprofit organizations that are committed to the conservation and/or preservation purposes of the easement. To qualify for federal tax benefits, easement-holding organizations must have the preservation of historic places as a part of their mission and must have the commitment and resources to enforce and monitor the easement. In fact, many easement-holding organizations have set aside easement endowments or stewardship funds that provide a designated source of funding to cover the obligations of the easement-holding organization. Easement-holding organizations should have either established funds or ongoing operational support to meet their stewardship obligations.
There are hundreds of easement-holding organizations and governmental entities across the country that accept and administer preservation easements. A few, like the National Trust for Historic Preservation, are national organizations; and some, like Historic New England, are regional. Most easement-holding organizations, however, operate at the state or local level.
Many of the National Trusts statewide and local partners are easement-holding organizations. Also, many State Historic Preservation Offices– state government agencies that operate historic preservation programs – hold preservation easements.
In the past few years, several organizations have been expressly created to promote and accept historic preservation easements. We strongly recommend that donors look to those organizations that have a strong track-record in historic preservation, and which are well-positioned to exercise a long-term stewardship role.
To find out what organizations in your area are accepting easements, contact the National Trust’s regional office for your state, or contact your State Historic Preservation Office.
Does the National Trust hold easements? Is it actively accepting easement donations?
The National Trust holds approximately 100 easements on historic properties across the country. These easements have been gradually acquired over three decades; some were granted to the National Trust as donations, others were acquired by the National Trust as a condition to preservation grants or other financial assistance, and still others were created to protect properties that the National Trust has acquired and then transferred to others.
For property owners who are interested in donating an easement to the National Trust, the National Trust’s easement policy is to encourage easement donors to look first to qualified local, statewide, or regional preservation organizations. Only when those organizations are unable or unwilling to accept a proposed easement donation (or if the prospective donor is unwilling to consider such a donation), and only if the property is of special historic, architectural, or archaeological significance – will the National Trust consider taking on such an easement.
Our strongest recommendation to property owners interested in donating an easement is to work with the National Trust’s Regional Office to identify an appropriate organization – preferably at the state or local level – to serve as an easement-holding organization for their property.
In recent years, many of the easements acquired by the National Trust have come through the Gifts of Heritage Program, a program that both raises funds for the National Trust and protects historic properties. The program encourages owners of historic properties to donate such properties to the National Trust as a charitable donation (either as a lifetime gift or as a bequest). Following acquisition by the Trust, such properties are protected with easements and then sold to preservation-minded buyers on the open market. The net proceeds of the sale are used to help preserve the 25 National Trust historic sites open to the general public, and the donated property is permanently protected.
If you are interested in donating a historic property as a Gifts of Heritage, please contact Marilyn Kochan, Director of Planned Giving, at marilyn_kochan@nthp.org.
In the past, I’ve seen easement promotions from the "National Architectural Trust?" Is that organization related to the National Trust?
No, the organizations are not related. The “National Architectural Trust,” is the former name of an organization that has actively promoted and solicited historic preservation easements in recent years. In 2007, following trademark litigation initiated by the National Trust, the National Architectural Trust changed its name to the Trust for Architectural Easements.
Does the National Trust have sample easement documents?
Yes, our model easement deed is available on request by emailing us at law@nthp.org. Our model easement represents a relatively detailed easement, and one that includes a number of provisions necessary to meet applicable IRS requirements to qualify for a donation deduction. However, it is very important to understand that every easement must be individually crafted to meet individual state law requirements, to address the character-defining features of a specific historic property, and to address the respective interests of the donor and the easement-holding organization. As noted earlier, the advice and assistance of a qualified attorney should be sought.
The National Trust’s model easement is only one example of a preservation easement deed – there are many other models. Most preservation organizations that hold easements have sample easement documents, and most are happy to share sample easement documents with prospective donors.
What is easement “baseline documentation?”
Baseline documentation refers to the set of photographs, site plans, floor plans, and other materials that record the condition of a historic property at the time an easement is put in place. Preservation easements address changes to existing conditions of a particular historic property. Consequently, it is important that the easement-holding organization and the easement donor or subsequent owner understand fully the significant historic or architectural features protected by the easement, and that they agree on the condition of those features at the time of the easement donation.
In order to fulfill these requirements, a preservation easement generally incorporates, by reference, “baseline” documentation establishing these features. This documentation is generally in the form of photographic documentation, textual descriptions of significant historic features and their conditions, and maps and plats of the property. In many cases, this documentation describes different characteristics of the property that may require different treatment under the easement – for example, an interior plan may denote areas that are subject to design review by the easement-holding organization and other areas that are not restricted.
The baseline documentation is typically created in duplicate with a copy retained both by the owner and the easement-holder. In the case of a conflict, the copy held by the easement-holding organization controls.
Are fees charged by easement-holding organizations? What is a stewardship fee? Are there other costs to the donor?
Most easement-holding organizations request – or may require – that easement donors provide a cash donation together with the easement, sometimes called a stewardship fee or endowment contribution. This monetary payment helps to assure that the easement-holding organization will have resources to enforce the restrictions of the easement, as required by the IRS for easements qualifying for the tax deduction. Whether described as a fee or contribution, this cash payment is considered by most easement-holding organizations to be an integral part of the easement donation. Donors wishing to deduct the amount of this monetary payment accompanying the easement donation are advised to check with their own tax advisors to determine whether the cash payment is deductible as a charitable contribution.
Organizations use different methods to calculate the amount needed to cover their stewardship responsibilities. Some organizations charge a flat amount, some use a percentage of the easement’s appraised value, some use a percentage of the property value prior to the easement donation, some use a sliding scale with a cap, and still others estimate annual expenses and then capitalize that amount as an endowment that can be drawn upon annually to cover stewardship costs.
There are likely to be additional costs to the donor beyond the endowment contribution or stewardship fee paid to the easement-holding organization, such as fees paid to lawyers, appraisers, and banks (for executing subordination agreements required to meet the requirements for the federal tax incentive), and for consultants. Some of these additional costs may be considered “miscellaneous itemized deductions,” which are deductible to the extent that they exceed two percent of a taxpayer’s adjusted gross income. Again, donors are advised to check with their own tax advisors. As stated earlier, donors and preservation organizations are strongly encouraged to consult with qualified legal counsel and tax advisors if they are contemplating donating or accepting preservation easements.
What are the federal tax benefits for an easement donation?
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.
Are there tax benefits at the state level as well?
In addition to the federal tax benefit, some states provide similar deductions against state income taxes for the donation of conservation and preservation easements – and some local jurisdictions recognize the effects of an easement in calculating real property taxes. In addition, a few states actually provide tax credits for conservation easements. Check with your State Historic Preservation Office or statewide preservation organization for more information on tax incentives for easements in your state.
How does one determine the value of an easement for purposes of calculating the deduction?
The 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).
I’ve seen statements to the effect that IRS guidelines provide that façade easements are worth 10-15 percent of the value of a particular property . . . is this true?
Not necessarily. Neither easement donors nor easement-holding organizations should rely on such statements. Easement values may far exceed or be far less than a 10-15 percent range, depending on the circumstances.
At one time, an article authored by an IRS analyst stated that the “proper valuation of a façade easement should range from approximately 10-15 percent of the value of the property.” In addition, a similar statement was included in an older version of an IRS audit guide. These materials have been interpreted by some to suggest that the IRS had accepted this valuation range for façade easements, despite the fact that the applicable 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. In recent months, the IRS has removed this language from its materials, and IRS officials have cautioned that the promotion of this type of valuation range may, in fact, be misleading.
My property is already protected against changes by future owners through a local preservation law . . . wouldn’t an easement be redundant?
Preservation easements and local historic preservation laws are two distinct legal tools that may be used to protect historic properties and districts – the first uses private legal rights and the second uses local governmental regulatory powers.
In many situations, preservation easements are granted on historic properties that are not covered by local historic preservation laws. Preservation easements on these types of properties are often the only significant preservation protections that apply, and may therefore be the only protection prohibiting demolition or other damage to the historic building.
In other situations, easements are granted on properties that are already subject to local historic preservation laws. If the local preservation law is weak and the easement strong, the easement may provide more protection than the local law: for example, the local law may authorize the municipality to delay but not prohibit a proposed demolition of a historic property, while the easement may absolutely prohibit demolition. Even in the case of a strong preservation law, an easement may include terms that go well beyond the requirements of that law. For example, some preservation easements protect interior architectural features (a restriction that is rarely imposed under local preservation laws); they may also require public visitation (an obligation not required by local preservation laws); others may prohibit construction on double lots, or eliminate subdivision, or other development rights that may exist under local zoning.
Where easements impose requirements that are substantially similar to local preservation laws, they may still provide an important public benefit. Although local preservation laws have rarely been repealed or overturned in their entirety, it is not unheard of for the historic designation of individual properties – or even entire historic districts – to be withdrawn by a municipality facing a threat or court challenge by a developer, or based on the persuasion of a politically powerful force. Even strong local preservation laws often include variance provisions, exceptions for cases of economic hardship, or “special merit” exceptions – regulatory loopholes that occasionally are utilized by owners of historic properties to allow development that would not otherwise be permitted under the local preservation law. In cases like this, easements may serve as an important “back-stop” to local preservation laws.
It is important for easement donors (and their appraisers) to recognize, however, that the existence of local preservation laws that already protect a historic property must be considered in the valuation of the easement in calculating the federal income tax deduction. The applicable IRS regulations state explicitly that the determination of value of a preservation easement must take into account “any effect from . . . historic preservation laws that already restrict the property’s potential highest and best use.” Although the impact of an easement donation on market value obviously depends on the circumstances of any particular case, façade easements that do little more than replicate the restrictions of already applicable local historic preservation laws are less likely to have a large impact on the market value. This is particularly likely to be the case in historic residential areas subject to strict design review controls under a local preservation ordinance.
I’ve recently been solicited to make an easement donation . . . what do I need to know?
First, you should know the organization you are dealing with. Obviously, it is important to ensure that the easement-holding organization to which you plan to donate an easement is a qualified preservation organization under state and federal law. But beyond this, because you care about the long term future of your historic property, the organization should also have the commitment, capacity and experience to monitor and enforce the easement over time. The organization should have a track-record that shows its commitment to historic preservation, and it should be structured in a manner that meets modern governance standards for nonprofit organizations.
Second, do not rely on promotional materials for tax or legal advice. Promotional materials may oversimplify the tax benefits for easement donations – for example, by suggesting standard percentage ranges for easement valuation, or by providing deduction “estimators” based on a standard percentage. Prospective donors should obtain qualified and independent advice from competent professionals, including qualified appraisers.
Third, don’t overvalue the tax deduction. Depending on the circumstances, easements that do little more than replicate the terms of an existing local landmarks law may not provide significant tax deductions. Deductions claimed for overvalued easements may be disallowed, and donors may be subject to penalties by the IRS.
I’ve heard that easements are starting to come under greater scrutiny by the IRS . . . should I be concerned?
Prospective donors and preservation organizations alike should be aware that preservation easements-and particularly façade easements-appear to be coming under increased scrutiny by the IRS. In fact, over the past year or so, easements have been coming under a higher level of scrutiny generally, with increased attention by the news media and by Congress as well. We believe that individuals and organizations that carefully comply with the various legal and appraisal requirements that relate to preservation easements should have no reason to be concerned, but this increased scrutiny reinforces the need to ensure that all such requirements are fully met.
In June 2004, the IRS issued a public notice indicating that it plans to start looking closely at charitable deductions taken for conservation easement donations. While the notice did not specifically identify preservation easements as a concern, an accompanying statement by IRS Commissioner Mark Everson noted that the Service had uncovered "numerous instances" where the tax benefits of preserving historic buildings had been "twisted for inappropriate individual benefit." Mr. Everson stated that the IRS would consider imposing penalties on promoters, appraisers, and other persons involved in improper transactions.
In late October 2004, the IRS Commissioner for Tax Exempt and Government Entities, Steven Miller, reiterated that the IRS is concerned about abuses in this area - both with respect to the promotion and the valuation of façade easements - and he stated that the IRS plans to take action to address its concerns. Mr. Miller specifically warned about substantial deductions being claimed by taxpayers for façade easement donations on properties already restricted by local preservation laws, in which the obligations imposed by the easement are essentially the same as already imposed by the local preservation law. (The original IRS notice from June 2004 and Mr. Miller's comments, set out in an October 2004 speech, are available at: http://www.irs.gov/charities/article/0,,id=124939,00.html.
Subsequent to these developments, the Washington Post published a multi-part series in mid-December 2004 that raised serious questions about the activities of several easement-holding organizations that have been aggressively marketing tax deductions for the donation of easements, particularly for façade easements in tightly regulated historic districts. The series prompted calls from key congressional leaders for stronger-and retroactive-penalties for those donors who claim exaggerated deductions for façade easements, as well as penalties for the organizations and promoters who encourage abuses. The National Trust has expressed support for efforts by the IRS to investigate problems when they have occurred, and for policy changes that would strengthen accountability requirements for easement donations and for easement-holding organizations. (Click here for a statement from Richard Moe.)
More recently, on January 27, 2005, the congressional Joint Committee on Taxation has called for drastic policy changes that could, if adopted, effectively dismantle federal tax incentives for preservation and conservation easements as of tax year 2006, including the elimination of any deduction for properties used as a donor's residence, and slashing all other easement deductions by at least two-thirds. While the National Trust supports efforts to eliminate abuses, these changes would effectively eliminate the program. Preservation and conservation organizations have expressed strong opposition to major changes in the incentive program. For more information, click here: http://www.nationaltrust.org/law/easements_alert.html. While it is too soon to tell whether major changes are likely, preservation organizations and prospective donors should keep abreast of new developments.
In the meantime, all of this increased attention reinforces that it is important for preservation organizations to make clear - and for easement donors, appraisers, and consultants to understand - the complexities and factors involved in valuing preservation easements. Organizations working in this area should avoid over-simplifying the subject of easement valuation. Donors should be cognizant of the need to obtain good tax and legal advice, and to take seriously the Service's concerns about valuation problems.
From the National Trust's perspective, preservation easements on properties already subject to local preservation laws may still provide important substantive preservation benefits. At the same time, the donation value of easements must be based on a case-by-case analysis of each property-and IRS regulations specifically require this analysis to take into account "any effect from . . . historic preservation laws that already restrict the property's potential highest and best use." Obviously, the value of a preservation easement depends on a number of factors, and preservation organizations should be clear that there is no "one size fits all" approach.
Where can I get more information about preservation easements?
Many easement-holding organizations have comprehensive information available either in publications or on the web. In addition, the following information may be helpful:
The National Trust offers two useful publications relating to the subject of preservation easements:
Establishing an Easement Program to Protect Historic, Scenic, and Natural Resources is an information booklet that provides practical advice on legal and administrative issues for organizations interested in establishing an easement program.
Appraising Easements is an up-to-date guide on appraising land conservation and historic preservation easements. Since the first edition was produced as a cooperative publication by the Land Trust Alliance and the National Trust in 1984, this publication (now in its third edition) is the most comprehensive set of guidelines on the subject of determining the value of conservation and preservation easements.
The Land Trust Alliance has extensive resources on conservation easements. While the LTA serves as a source of information and assistance to land trust organizations, much of that information is also relevant to preservation easements. In particular, the LTA offers a number of excellent publications, including the Conservation Easement Handbook (which includes materials contributed by the National Trust for Historic Preservation). LTA also has developed a comprehensive set of “Standards and Practices” for land trusts [http://www.lta.org/sp/revision.htm], which the National Trust strongly recommends to organizations that hold preservation easements.
In addition to this information, the National Park Service produces information and materials on the subject of preservation easements. Most of this information is accessible on the web at: http://www2.cr.nps.gov/tps/tax/easement.htm
The Internal Revenue Service’s concerns relating
to abuses in the area of conservation and preservation
easements are described in detail at:
http://www.irs.gov/charities/article/0,,id=124939,00.html