Easement Tax Benefits
Property owners who donate a preservation or conservation easement to Preservation Connecticut may be eligible for a federal tax deduction, or a reduction in estate or property taxes. In both situations, an accurate valuation of the easement by a qualified appraiser is very important. Benefits vary according to each donor’s situation, and we are only providing general notes here. You should consult your attorney, accountant, or tax advisor before taking any actions relating to your property.
Federal Tax Deduction
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 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.C. § 170, I.R.S. Regs. § 1.170A-14). The amount of the deduction is equal to the value of the preservation easement (see Easement Valuation, below). 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-generating 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 Preservation Connecticut 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 certain local historic districts. 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.
Reduction in Estate and Property Taxes
The gift of a preservation easement to Preservation Connecticut 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
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.