Historic Preservation Easements

A Historic Preservation Tool with Federal Tax Benefits  What is a Historic Preservation Easement?
A preservation easement is a voluntary legal agreement that protects a significant historic, archaeological, or cultural resource. An easement provides assurance to the owner of a historic or cultural property that the property's intrinsic values will be preserved through subsequent ownership. In addition, the owner may obtain substantial tax benefits. Historic preservation easements also are used to protect historic landscapes, battlefields, traditional cultural places, or archaeological sites. Under the terms of an easement, a property owner grants a portion of, or interest in, her property rights to an organization whose mission includes historic preservation. Once recorded, an easement becomes part of the property's chain of title and usually "runs with the land" in perpetuity, thus binding not only the owner who grants the easement but all future owners as well.

Historic Preservation Easements -
A Directory of Historic Preservation
Easement Holding Organizations (2003) (PDF format)
 

Benefits of Donating an Easement
An easement is a particularly useful historic preservation tool in several respects. First, it allows an individual to retain private ownership of the property and obtain potential financial benefits. Second, an easement binds not only the current owner, but future owners as well, ensuring that the property will be maintained and preserved by future owners. Third, easements are tailored to meet the needs of the property owner, the individual resource, and the mission of the protecting organization. Thus an easement provides the owner with a flexible tool with which to preserve the property for future generations. If certain criteria are met the owner also can receive a Federal income tax deduction equivalent to the value of the rights given away to a charitable or governmental organization. Additional financial benefits may be available in the form of reduced estate, gift, and local property taxes.

Financial Incentives
When the owner donates an easement to a charitable or governmental organization, she may be eligible to claim a charitable deduction on Federal income tax in accordance with rules set by the IRS. Federal law also requires payment of a $500 filing fee to IRS for all easement donations valued over $10,000. For additional information, see IRS Publication 526. Potential easement donors should consult an accountant, tax attorney, or other professional tax advisor or the IRS for help in determining whether these incentives pertain to their own financial circumstances.

Historic Tudor Place in Georgetown, Washington, DC.
Photo courtesy Tudor Place, Inc.The value of the easement is based on the difference between the appraised fair market value of the property prior to conveying an easement and its value with the easement restrictions in place. Under most circumstances the value of an easement depends upon the property's development potential and operates under the assumption that an easement limits development, thereby reducing the value of the property. For further guidance on determining the value of an easement a professional appraiser should be consulted.

Federal estate taxes for property heirs also may be reduced because the fair market value of the property was reduced during the donor's lifetime by the easement restrictions. Many state tax codes contain income and estate tax provisions similar to Federal law. Consequently, a reduction in the value of property subject to an easement may yield state and local tax benefits as well. A property that is assessed based upon its easement-restricted use rather than at its potential, fully-developed use could result in a lower tax rate. A tax attorney or accountant should be consulted in this regard.

Qualified Properties
According to the IRS an easement must either preserve a certified historic structure or a historically important land area to qualify for federal income and estate tax deductions. The IRS definition of a certified historic structure includes any building, structure, or land area that is:

Listed in the National Register of Historic Places, or
Located in a registered historic district and certified by the U.S. Department of the Interior as being historically significant to the district.
To apply for certification, an easement donor should contact the State Historic Preservation Office (SHPO) to request a Historic Preservation Certification Application. The property owner then completes Part 1 of the application and returns it to the SHPO, which forwards it to the National Park Service, which issues certification on behalf of the U.S. Department of the Interior. The property must be certified by the National Park Service prior to conveying the easement, or before the owner files a Federal income tax return for the year in which the easement was granted. The IRS definition of historically important land areas include:
independently significant areas, including any related historic resources that meet National Register Criteria for Evaluation; or
land areas within registered historic districts, including buildings, that contribute to the significance of the historic district; or
land areas adjacent to a property individually listed in the National Register of Historic Places (but not within a historic district) where physical or environmental features of the land contribute to the historic or cultural integrity of the historic property. Common examples of historically important land areas include traditional cultural places, archaeological sites, battlefields, and historic cultural and designed landscapes.

In order to claim the Federal income tax deduction the certified historic structure or historically important land area must be accessible to the public. The degree of access is tailored according to the historic resource under protection. For example, the amount of access required for a sensitive archeological site or traditional cultural place with religious significance protected by an easement may be as little as a few hours a year. Other means of providing access may include ensuring visual access from a public roadway for a historic building and grounds subject to a facade and scenic easement, or allowing the public to tour the inside of a historic house subject to an interior easement two days per year. Often, the easement-holding organization can assist the owner in finding a balance between protecting the owner's privacy and providing a public benefit. Generally, the accessibility requirement is met as long as the property owner is not the sole individual benefiting from the donation of the easement.

Qualified Organizations
The IRS recognizes a qualified organization for accepting easements as one that is committed to protecting the historic preservation purposes of the donation, and has the resources to enforce the restrictions. Qualified organizations may include a governmental unit or a charitable organization (§ 501(c)(3)) such as a community land trust or historic preservation organization. An owner should verify that an organization is qualified prior to conveying an easement. Verification can be obtained by contacting the IRS Taxpayer Assistance office in your area.

Springtime at Tudor Place in Georgetown, Washington, DC.
Photo courtesy Tudor Place, Inc. Many easement holding organizations require the easement donor to make an additional donation of funds to help administer the easement. These funds are often held in an endowment that generates an annual income to pay for easement administration costs such as staff time and travel expenses, or needed legal services.

Preservation Easement Restrictions
An easement gives the organization to which it is conveyed the legal authority and responsibility to enforce its terms. This often includes the right to inspect the property to ensure that the owner is complying with the terms. Historic preservation easements typically prohibit the owner from demolishing or making alterations to the property without prior review, consultation and approval by the easement holder. For example, an easement might prohibit facade alterations or construction of a building addition without first obtaining approval from the easement holder. Restrictions on subdividing and developing the property are common as well.

Some easements also require the owner to make improvements to the property or to maintain it in a certain physical condition. For example, an owner might be required to repair a deteriorated porch within a specific period after the easement is conveyed. Furthermore, as discussed earlier, some degree of public access to the site is required in order to claim a Federal income tax deduction. If upon inspection the easement holding organization finds that the terms of the easement have not been upheld, the owner may be held responsible for covering the costs of reversing an unacceptable treatment or face other penalties.

In most cases, easement holding organizations have staff that can prepare a draft easement document for review by the donor's attorney. Many organizations also have the historic preservation and material conservation expertise to offer sound conservation, historical or design guidance to the owner of a property protected by an easement.

Combining an Easement with Federal
Historic Rehabilitation Tax Credits
A property owner conveying an easement on a historic building may also apply for a 20% tax credit under the Federal Historic Preservation Tax Incentives Program. The 20% tax credit applies to any project that the Secretary of the Interior designates a certified rehabilitation of a certified historic structure. This credit is available for properties rehabilitated for commercial, industrial, agricultural, or rental residential purposes, but it is not available for properties used exclusively as the owner's private residence.

According to the IRS, when an easement is donated on a property undergoing a certified rehabilitation the owner must adjust the depreciable basis to reflect the diminution in value of the building that occurs when an easement is conveyed.* This reduction may impact the amount of rehabilitation credit that an owner is allowed to take. Timing plays a crucial role when combining an easement donation with the 20% tax credit and may impact one or both of the benefits. An accountant or tax attorney should be consulted to determine the most advantageous method for combining these benefits. For further information about the 20% tax credit or any applicable state incentives for preservation contact your State Historic Preservation Office.

Tips for Property Owners Considering
Conveying a Historic Preservation Easement

When considering whether to donate an easement, a property owner should consider the following questions:

Has the property been designated as historically significant through National Register listing?

Is the property in a Registered Historic District?

Are there state or local tax benefits to donating an easement?

What are the financial implications of donating an easement?

How much public access would be required to claim a Federal income tax deduction?

Is the easement-holding organization staffed by historic preservation professionals?

Does the easement-holding organization charge the donor a fee to cover administrative costs incurred by accepting the easement?

Does the easement holding organization have the time and resources to monitor the terms of the easement?

How specific will the easement need to be in order to protect the property?

Property owners interested in donating a historic preservation easement for Federal tax benefits may contact their State Historic Preservation Office for a list of easement-holding organizations in their area.
 

Further Reading
The Conservation Easement Handbook: Managing Land Conservation and Historic Preservation Easement Programs. Janet Diehl and Thomas S. Barrett. Alexandria, VA: Land Trust Exchange and Trust for Public Land, 1988.

Dollar$ and Sense of Battlefield Preservation: The Economic Benefits of Protecting Civil War Battlefields. Frances H. Kennedy and Douglas R. Porter. Washington, D.C.: The Conservation Fund, 1994.

Appraising Easements: Guidelines for the Valuation of Historic Preservation and Land Conservation Easements. Washington, D.C.: Land Trust Alliance and National Trust for Historic Preservation, 1990.

Preserving Family Lands: A Landowner's Introduction to Tax Issues and Other Considerations. Stephen J. Small. Boston, MA: Landowner Planning Center, 1992.

* Refer to IRS Revenue Ruling 89-90 regarding combining the 20% rehabilitation tax credit with an charitable deduction for an easement donation. Additional information and assistance regarding Federal tax issues can be obtained by calling the toll free Internal Revenue Service Taxpayer Assistance office in your region.