Conservation easement made easy, with five steps.

As a legal agreement designed to protect a significant historic, archaeological or cultural resource, a historic preservation conservation easement enables a property owner to establish certain preservation restrictions while retaining possession and use of the property.

By donating a conservation easement in perpetuity to a qualified organization such as Preservation Easement Trust, Inc., the property owner may qualify for a charitable contribution deduction for federal income tax purposes. The conservation easement must be placed on property that is:

1) A certified historic structure or historically important land area; and

2) Accessible to the public, with the degree of access tailored according to the historic resource.

Once donated, a conservation easement becomes part of the property's chain of title and permanently remains with the historic property, binding current and future owners. In short, the conservation easement donor continues to own, manage and maintain the property within the limits of the conservation easement, while bearing all costs and liabilities related to ownership.

As an incentive, under the Internal Revenue Code section 170(h), federal law permits the donation of a conservation easement to be treated as a tax-deductible charitable contribution, with the property owner receiving an income tax deduction equivalent to the fair market value of the conservation easement, as determined by a real estate appraiser. While conservation easements can be obtained on historically significant land areas, interior spaces and development rights, the most popular historic preservation conservation easement is the facade conservation easement, which permanently prevents demolition, neglect and insensitive alterations to the exterior facade of a certified historic structure. Facade conservation easements are usually appraised at approximately 10 to 15% of the property's fair market value.

The income tax deduction can be spread over six tax years and, in the majority of cases, may be applied to the property owner's federal and state income tax returns. Individuals, including partnerships, LLC's, S-corporations and trusts that pass tax benefits through to individual shareholders or beneficiaries, are limited to an annual charitable contribution deduction of 50% of the adjusted gross income prior to the charitable contribution deduction in which the non-cash component (i.e., the conservation easement) cannot exceed 30% of the adjusted gross income. In contrast, corporations that file IRS Form 1120 are limited to an annual charitable contribution deduction of 10% of the adjusted gross income prior to the charitable contribution deduction. Excess charitable contribution deductions can be carried forward for up to an additional five years. Also, if the property has been owned for less than one year, the charitable contribution deduction generated from a conservation easement donation cannot exceed the property owner's adjusted basis in the property.

When conveying a historic preservation conservation easement to Preservation Easement Trust, the donation process can be divided into five steps: submit conservation easement application form; obtain certified historic structure designation; subordinate mortgages; perform real estate appraisal; and convey conservation easement. The entire donation process can take anywhere from two to six months to complete. Of course, before proceeding with a conservation easement donation, potential easement donors are always advised to consult with their attorneys and tax professionals to understand the specific legal requirements and tax consequences associated with conveying a conservation easement and receiving a tax deduction.

1) Submit conservation easement application form. The historic preservation conservation easement donor submits the completed two-page conservation easement application. Then, the application is promptly reviewed and, if approved, the easement donor is sent an easement donation instructional package, which includes an acceptance letter that must be signed by the easement donor and returned to Preservation Easement Trust.

2) Obtain certified historic structure designation. To qualify for a historic preservation conservation easement donation and its associated federal tax benefits, a property must be either a certified historic structure or historically important land area. A certified historic structure is a building or structure that is either individually listed in the National Register of Historic Places or deemed to be contributing to the historic significance of a National Register historic district or a certified local historic district. So, if a building or structure is not a certified historic structure, a certified historic structure designation from the National Park Service must be obtained. The certification process is administered by the State Historic Preservation Office and requires approval from the National Park Service, a division of the U.S. Department of the Interior. Historical property information and photographic images are used to justify the historic significance of the property. While both the SHPO and NPS review the applications, the SHPO provides advice and comments and the NPS makes the actual certification decision. In many cases, the property owner engages an experienced historic preservation consultant, who has a relationship with the local SHPO, to prepare and submit the NPS application.

3) Subordinate mortgages. If the easement donor wishes to utilize the tax deduction benefit associated with a historic preservation conservation easement donation, all mortgages (and other encumbrances) must be subordinated to the conservation easement. The mortgage lenders are required to subordinate their rights in the property to the rights of the easement holder, so that in the event of a foreclosure, the conservation easement will not be extinguished. Therefore, if a mortgage exists, the property owner (or one's legal counsel) must submit a mortgage subordination agreement, with a copy of the conservation easement deed, to each mortgage lender for its approval.

4) Perform real estate appraisal. Subject to changes in IRS precedent, the value of the conservation easement donation is usually determined by applying the "before and after" valuation approach. Simply stated, the amount of the charitable deduction is computed by determining the difference between the fair market value of the property before and after the granting of the conservation easement. The easement donor engages a real estate appraiser to perform the appraisal, which must be prepared no earlier than 60 days prior to the conservation easement donation date, but no later than the due date (including extensions) of the income tax return in which the charitable deduction is first claimed. To facilitate the appraisal process, Preservation Easement Trust provides a list of real estate appraisers with conservation easement valuation experience.

5) Convey conservation easement. Once all of the aforementioned steps have been completed, the easement donor is sent an easement donation closing package. To initiate the closing process, the easement donor sends the notarized conservation easement deed with a tax-deductible charitable cash contribution to Preservation Easement Trust. In return, Preservation Easement Trust provides a completed IRS Form 8283 that the easement donor attaches to the income tax return for the year in which the conservation easement is contributed and a deduction is first claimed. Lastly, Preservation Easement Trust records the conservation easement deed with the county or town land records office and forwards a copy to the easement donor and mortgage lender(s).

Upon receiving a conservation easement donation, Preservation Easement Trust assumes permanent responsibility for monitoring and enforcing the provisions of the conservation easement. Stewardship responsibilities include performing annual property inspections, tracking changes in ownership, answering owner questions, approving permitted activities and correcting violations. Preservation Easement Trust pro-actively works with property owners to avoid any potential conflicts.

Because the conservation easement is granted in perpetuity, these responsibilities also represent a significant annual expense. As a result, Preservation Easement Trust requires a tax-deductible charitable cash contribution with all conservation easement donations.

ROBERT PLOTKA, CFA 

PRESIDENT

PRESERVATION EASEMENT TRUST, INC.