Historical Façade Conservation Easement – Charitable Contribution Deduction
The States comprising the eastern seaboard and surrounding areas are home to numerous historical structures, by virtue of being the earliest European settlements and the birthplace of the United States. Many structures in Philadelphia, New Jersey, and so on are or should belong on a register of historic places. If you or your business own a historic structure, you may be eligible for a sizeable charitable deduction by simply donating – via an easement – just the outside, or the façade, of the structure, while using the inside in any way you see fit.
As part of an effort to preserve the nation’s historic structures, Congress allows an income tax deduction for owners of significant property who give up certain rights of ownership to preserve and not alter their land or buildings. An owner of a historic building may make a charitable contribution deduction by allowing a restriction on making changes to the exterior of the building – a façade conservation easement. Under the Pension Protection Act of 2006 (“PPA”), there are several requirements with respect to a façade easement contribution. The PPA rules govern façade charitable contributions made after July 25, 2006. Some requirements may not apply if the building is listed in the National Register of Historic Places. The “qualified conservation contribution” is governed by Internal Revenue Code (“IRC”) section 170(h) and Treas. Reg. §1.170A-14.
Treas. Reg. § 1.170A-14
In general, a deduction under section 170 is not allowed for a charitable contribution of any interest in property that consists of less than the donor’s entire interest in the property. However, Treas. Reg. 1.170A-14(a) explains that a deduction may be allowed under section 170(f)(3)(B)(iii) for the value of a qualified conservation contribution under certain conditions. A qualified conservation contribution is the contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. To be eligible for this deduction, the conservation purpose must be protected in perpetuity.
Qualified Real Property Interest – Façade Easement
The façade easement must be on a “certified historic structure.” Section 170(h)(4)(C) states that a certified historic structure is any building, structure, or land which is listed in the Historic Register or any building that is located in a registered historic district and is certified by the Secretary of the Interior as being of historic significance to the district. The façade easement can be on any structure that qualifies, regardless if it is used for a business or personal purpose.
The easement must include restrictions preserving the entire exterior of the building (including front, sides, rear, and height) and prohibiting any change to the exterior of the building inconsistent with its historical character.
If the building is not on the Historic Register (and qualifies by being located in a registered historic district), the interest contributed must include a restriction that preserves the entirety of the exterior of the building and prohibits any non-historical changes to the exterior (see IRC section 170(h)(4)(B))
A “qualified organization” or “eligible donee” must be a governmental unit, a publicly-supported charity; or a support organization described in section 509(a)(3) that is controlled by a governmental unit or a publicly supported charitable organization. The eligible donee must have the commitment to protect the conservation purposes and the resources to enforce the restrictions (see Treas. Reg. 1.170A-14(c)(1)). Any organization on Pub. 78 may be qualified, but it must meet the commitment and resources test.
Additionally, the donor and donee must enter into a written agreement certifying (under penalty of perjury) that the donee is a qualified donee with a purpose of historic preservation as well as having the resources to manage and enforce restrictions and the commitment to do so. The easement is normally conveyed to the donee organization by a deed which is then recorded in appropriate state or county records. The deed must preserve the façade in perpetuity (see below). If a contribution of an interest in real property is subject to a mortgage, no deduction is allowed unless the mortgage holder subordinates its rights in the property to the right of the donee to enforce the façade easement in perpetuity.
Conservation Purposes and Exclusivity
At least some visual access by the public to the historical structure is required. If not visible from public way, the terms of easement must give public regular opportunities to view the property. Factors to be considered in determining the type and amount of public access required by the regulations include the historical significance of the donated property, the nature of the features that are the subject of the easement, the remoteness or accessibility of the site of the donated property, the possibility of physical hazards to the public visiting the property (for example, an unoccupied structure in a dilapidated condition), the extent to which public access would be an unreasonable intrusion on any privacy interests of individuals living on the property, the degree to which public access would impair the preservation interests which are the subject of the donation, and the availability of opportunities for the public to view the property by means other than visits to the site. Examples can be found in Treas. Reg. § 1.170A-14(d)(5)(v).
The donated façade must be made exclusively for conservation purposes. A deduction will not be allowed if the contribution would accomplish one of the enumerated conservation purposes but would permit destruction of other significant conservation interests. The conservation purpose must be protected in perpetuity. Any retained interest in property by donor and/or donor’s successor in interest must be subject to legally enforceable restrictions. The “in perpetuity” requirement is in addition to the “exclusively for conservation purpose” requirement. (See section 170(h)(2)(C) & Treas. Regs. §1.170A-14(e) & (g)).
The donor of a façade easement may be entitled to claim a charitable contribution deduction equal to the fair market value (“FMV”) of the easement. FMV is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” Treas. Reg. § 1.170A-1(c)(2
However, under section 170(b)(1)(E), an individual may be allowed a deduction for any qualified conservation contribution to a qualified organization to the extent the aggregate of such contributions does not exceed the excess of 50 percent of the individual’s contribution base over the amount of all other charitable contributions allowed under section 170(b)(1) (the 50 percent limitation). If the aggregate amount of qualified conservation contributions exceeds the 50 percent limitation, section 170(b)(1)(E)(ii) provides that the excess will be treated as a charitable contribution to which section 170(b)(1)(E)(i) applies in each of the 15 succeeding years in order of time.
The FMV of the easement is normally determined by the “before and after” method. This approach appraises the underlying property before the grant of the easement and after the grant of the easement, with the difference being the FMV of the easement.
It is possible that the grant of an easement will have no significant effect on the value of the property, particularly if the easement is not more restrictive than local ordinances already in effect. Some easements may even enhance value of the entire property or surrounding land (if owned by the same owner). No deduction is allowable for an easement that has no value. See Treas. Reg. § 1.170A-14(h)(3)(ii). The easement should be valued only to extent easement restriction is more stringent than other restrictions already on property.
No deduction is allowed unless the donor properly substantiates the charitable contribution. The following must be attached to the donor’s income tax return:
- A “qualified appraisal” of the façade easement prepared by a “qualified appraiser” (no matter what the amount of the claimed deduction);
- A fully-completed Form 8283 (the “appraisal summary”);
- Photographs of the entire exterior of the building; and
- A description of all restrictions on the development of the building.
Qualified Appraisal and Qualified Appraiser. The IRC and Treasury Regulations provide specific requirements for a “qualified appraisal” and a “qualified appraiser.”
A qualified appraisal must comply with all the requirements of Treas. Reg. 1.170A-13(c)(3) and must be conducted by a qualified appraiser in accordance with generally accepted appraisal standards. It will be treated as meeting generally accepted appraisal standards if, for example, it is consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice. A qualified appraisal must be made no earlier than 60 days prior to the date of contribution of the appraised property and received by the donor before the due date (including extensions) of the return on which a deduction is first claimed.
Under section 170(f)(11)(E)(ii), a qualified appraiser is an individual who regularly performs appraisals for compensation and who has earned an appraisal designation from a professional appraiser organization or has met minimum education and experience requirements as set forth in regulations. Under section 170(f)(11)(iii), for each specific appraisal, an individual will not be treated as a qualified appraiser unless the individual demonstrates verifiable education and experience in valuing the type of property subject to the appraisal and has not been prohibited from practicing before the IRS at any time during the 3-year period ending on the date of the appraisal.
Form 8283. A fully-completed Form 8283 is the “appraisal summary” and must be attached to the tax return for the year the property is contributed and a deduction is first claimed. For a contribution for which a deduction of more than $5,000 is claimed, the form requires signatures of the donee and the qualified appraiser, in addition to other important information relevant to the charitable contribution of the façade easement. See Treas. Reg. 1.170A13(c)(4).
Contemporaneous Written Acknowledgment. For any charitable contribution of $250 or more, no deduction is allowed unless the taxpayer obtains a contemporaneous written acknowledgment, as required by section 170(f)(8). This acknowledgment must contain the amount of cash and a description of any property contributed, whether the donee organization provided any goods or services in consideration for any property contributed and, if so, a description and good faith estimate of the value of any such goods or services. The donor must obtain the acknowledgment on or before the earlier of the date on which the taxpayer files a return for the year the contribution was made, or the due date (including extensions) for filing the return.
A $500 filing fee must be paid with a tax return for any charitable deductions in relation if façade easements above $10,000. See Form 8283-V, Payment Voucher for Filing Fee.
When a façade easement is conveyed during the same year that a qualified rehabilitated building is placed in service, the taxpayer will not be entitled to claim the portion of the rehabilitation tax credit attributable to the façade easement.
A charitable contribution deduction may be disallowed and penalties imposed on the donor if substantiation or other requirements are not met, or if the façade easement is overvalued. In addition, under section 6695A (added by the PPA), if the claimed value of property based on an appraisal results in a substantial or gross valuation misstatement, a penalty is imposed on any person who prepared the appraisal and who knew, or reasonably should have known, the appraisal would be used in connection with a tax return or claim for refund. The appraiser must make a written declaration that he or she is aware of this penalty provision.
About the Author
Yuri Mitchell concentrates his practice in the representation of businesses and individuals in a variety of tax and corporate matters. His clients rely on him for his understanding of the legal and financial landscape in the areas of entity choice and formation, mergers and acquisitions, restructurings, and the associated tax impact of a particular transaction. Learn more.