Connecticut Trust For Historic Preservation

Tax Advantages of Preservation Easement Donations

Tax Advantages of Preservation Easement Donations

Federal Income Tax Benefits

Because preservation easements serve a public benefit by protecting the nation's historic resources, the federal government has established income tax incentives available to qualified donors of such easements. Under the Internal Revenue Service Code, a taxpayer may claim a tax deduction for the donation of a preservation easement if the donation reduces the value of the property and the donation meets I.R.S. guidelines (I.R.S. Code of 1954 as amended, Section 170, and I.R.S. Regulations Section 1.170A-14). The amount of the deduction is equal to the value of the preservation easement (see Easement Valuation). If the donation of a preservation easement has the effect of increasing the value of any other property owned by the donor, the amount of tax deduction will be reduced by the amount of any increase in the value of the other property.

For income property, the donor's basis in the property subject to the easement will be reduced by the proportion that the value of the easement bears to the fair market value of the property before the donation. When a preservation easement is donated on a mortgaged property, the mortgagee must subordinate its rights in the property to the right of the Connecticut Trust to enforce the easement's provisions.

To qualify for the federal income tax benefits, the buildings must be "certified historic structures," which are defined as those individually listed on the National Register of Historic Places or certified as contributing to a National Register Historic District or to a Local Historic District. A building is considered to be a certified historic structure if it becomes certified either by the time of the preservation easement donation or by the due date for filing the donor's tax return for the year of the donation.

An historically important land area is a land area within a registered historic district; adjacent to a property listed individually on the National Register where the land features contribute to the historic or cultural integrity of the property; or one which independently significant and meets National Register criteria.

Tax benefits vary according to each donor's situation and therefore you should consult your attorney, account or tax advisor.

Estate and Property Taxes

The gift of a preservation easement to the Connecticut Trust may also reduce the federal estate taxes that would be otherwise be payable at the donor's death. If the gift is made during the lifetime of the donor, the value of the gift will not be included in the value of the donor's estate.

As local property tax assessments are based on the fair market value of the property, the impact of the donation of a preservation easement on the property's value can be considered by the municipality when appraising the property for assessment purposes. Connecticut law allows the donor of an easement to request a revaluation of the affected property.

Easement Valuation

The value of a preservation easement contribution is determined by an independent real estate appraiser who is familiar with the appraisal of preservation easements. The donor is responsible for obtaining this appraisal.

As a rule, the value of a preservation easement is equal to any reduction in value of the property which results from subjecting the property to the easement's restrictions. The appraiser determines this value by establishing the fair market value of the property of the property as restricted, after the granting of the preservation easement. The difference between the two values is the value of the easement.

Principal considerations in the appraisal process include the nature and extent of the restrictions imposed by the preservation easement, the type and location of the property, the property's development potential and the likelihood of its development, and any existing, restrictions on the property (e.g., zoning, local historic district regulations, other deed restrictions, etc.). Generally the greater the restrictions in the preservation easement, the greater the value of the easement and the tax benefits to the donor.

The specific tax consequences of a preservation easement donation are determined by the donor, assisted by the donor's attorney or accountant, and the taxing authorities. The donor is encouraged to consult with his or her attorney and accountant regarding specific benefits as the Connecticut Trust cannot give tax advice nor does it make appraisals.