In 1935, Congress established as a national policy the preservation “for public use historic sites, buildings, and objects of national significance for the inspiration and benefit of the people of the United States.” Since that time, Congress has sought to implement this general policy through, among other legislative initiatives, historic preservation tax incentives.

One of the preservation tax incentives available to taxpayers is the “qualified conservation contribution” under Section 170(h) of the Internal Revenue Code (“IRC”), which includes, among other things, the historic preservation easement. Under this program, a taxpayer may receive a tax benefit upon the conveyance of a perpetual easement in an eligible historic property for the purpose of protecting and maintaining certain attributes of the property, such as an historic landscape or building facade. The conveyance of easement rights in an eligible historic property is considered a charitable donation under the IRC. In order to take advantage of this tax benefit, a taxpayer must convey the historic preservation easement to a “qualified organization,” which is defined under the IRC and related regulations promulgated by the Internal Revenue Service (“IRS”). Where an eligible historic property is encumbered by a mortgage the taxpayer must also obtain, as required by Treasury Regulation 1.170A-14, an agreement from the mortgagee subordinating its rights in the property to the right of the donee under the historic preservation easement “to enforce the conservation purposes of the gift in perpetuity.”

Historic preservation easements may be given for income-producing properties, as well as non-income producing properties, such as an historic home that qualifies as a “certified historic structure” under the IRC. In either event, IRS regulations state that “some visual public access to the donated property is required” in order for the value of the historic preservation easement to be deductible. The value of an historic preservation easement is determined by subtracting the fair market price of the subject property without the easement from the fair market price of the subject property with the restrictions in place.

In addition to the historic preservation easement, Section 47 of the IRC provides taxpayers with another preservation tax incentive — the rehabilitation tax credit. This program provides that a taxpayer who rehabilitates a certified historic structure may receive a credit of 20% of the “qualified rehabilitation expenditures” used in performing this task. The IRC defines a qualified rehabilitation expenditure as a cost or expense made in connection with rehabilitation, which is “properly chargeable to capital account” for certain classes of depreciable real estate, such as rental housing.

Significantly, a charitable deduction for an historic preservation easement donation may be taken in combination with the receipt of benefits under the rehabilitation tax credit program. However, if a taxpayer donated an historic preservation easement in a certified historic structure and, during the same year, put the certified historic structure back in service (following rehabilitation) the taxpayer would be precluded from obtaining any portion of the rehabilitation tax credit attributable to the easement and, if claimed and received, would be subject to recapture.

The foregoing discussion provides a brief overview of historic preservation easements as qualified conservation contributions and the rehabilitation tax credit program. A complete description of these preservation tax incentives is beyond the scope of this article. Given the complexities inherent in federal tax law (and numerous other potentially applicable laws, regulations and ordinances not discussed here) all owners and future purchasers of historic properties would be well advised to seek legal counsel before conveying an historic preservation easement or embarking upon the rehabilitation of an historic structure.

Vincent Mangini is a member of the Real Estate Group at Stark & Stark, 993 Lenox Drive, Lawrenceville, NJ 609-896-9060.

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