Demystifying the Federal Historic Preservation Tax Incentive Program

By James M. Kearns

In Brief

An Underutilized Deduction for Property Owners

Facade conservation easements, under the Federal Historic Preservation Tax Incentive Program, are one of the most underutilized tax deductions available to historic property owners. Many taxpayers are uncertain if their property qualifies and are worried about refinancing and marketability. Historic trusts, not-for-profit organizations that administer conservation easements, can make the procedure easier for taxpayers and their financial advisors. Taxpayers should be aware of this opportunity to save money while also serving the public interest by preserving historic properties in urban settings for future generations.

Since 1976, the Federal Historic Preservation Tax Incentive Program has allowed owners of historic properties to donate what is known as a facade conservation easement to a qualified charitable organization. The purpose of the conservation easement is to ensure that the architectural integrity of a historic property’s exterior is maintained. The income tax deduction for this donation ranges between 10% and 15% of the fair market value of the property. This deduction can be spread over six years and, in the majority of cases, may be applied to the property owner’s federal and state income tax returns.

After donating a facade conservation easement, the owner retains the property’s title. The owner can live in it, rent it, remodel its interior, and transfer its ownership. The owner must, however, receive preapproval of any changes to the property’s exterior. Since these properties are located in historic districts, preapproval of exterior changes is, in most cases, already required by local government regulations.

Considering the significant tax benefits, it would be expected that most owners of qualifying properties would make this donation standard procedure.

Unfortunately, the lack of available information concerning the incentive and the effort required to complete the process have led to less than 1% participation from qualifying owners. Both of these issues are being rectified. Some charitable organizations are now specializing in holding conservation easements and taking a proactive role in educating the public. These specialized organizations, often called historic trusts, have assumed the responsibility for facilitating the 90-day process for the owner. Leveraging the experience and reputation of these historic trusts has reduced the time required from property owners and their accounting and legal advisors to less than three hours for the average residence.


Successful preservation demands not only the participation of civic groups and local government, but also the active involvement of individual property owners. To facilitate property owner awareness of its role in preserving our historic heritage, Congress commissioned the U.S. National Park Service to administer the Federal Historic Preservation Tax Incentive Program. IRC section 170 provides for charitable income deductions for contribution of partial interests in a historic property for the purpose of conservation. This conservation easement does not prevent all changes to the historic property, but requires that exterior changes receive prior approval from the historic trust to which it was donated. This preapproval ensures that exterior changes are consistent with the original architectural style. Only conservation easements that have been granted in perpetuity are eligible for tax benefits.

The detailed regulations governing the conditions under which property owners may claim a charitable contribution tax deduction upon donating a facade conservation easement are specified in Treasury Regulations section 1.170A-14:

(a) Qualified conservation contributions. A deduction under section 170 is generally not allowed for a charitable contribution of any interest in property that consists of less than the donor’s entire interest in the property other than certain transfers in trust (see section 1.170A-6 relating to charitable contributions in trust and section 1.170A-7 relating to contributions not in trust of partial interests in property). However, a deduction may be allowed under section 170(f)(3)(B)(iii) for the value of a qualified conservation contribution if the requirements of this section are met. 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 a deduction under this section, the conservation purpose must be protected in perpetuity.

The first provision makes it clear that the partial release of a property interest does qualify as a charitable contribution deduction if it is a “qualified conservation contribution.” In addition, the program should not be confused with donation programs that require reconstruction, restoration, or the opening of the property to the public. None of these requirements apply to the facade conservation easement program.

Qualification. To qualify as historically significant, a property must either be located within a historic district designated in the National Register of Historic Places and certified as a historically significant structure by the National Park Service, or be separately identified on the register. To take the tax deduction, the easement on the property must be donated to a charitable organization qualified by the IRS to accept such contributions.

Although these qualifications may appear restrictive, millions of commercial and residential properties qualify. And there are no minimums or maximums as to the property’s fair market value. The trust can properly assess a property’s historic qualification, and will work with the National Park Service as necessary.

Other qualifications include that the fair market value of the contribution be appraised within 60 days of the donation date, and that, if the property is mortgaged, the lender consent to the easement’s running with the property in perpetuity. Meeting these qualifications is discussed below.

Perceived Risks

Many property owners perceive that there are risks to donating a facade conservation easement and subsequently claiming it as a tax deduction. Three of the more common misconceptions include the following:

Audit potential. The fact that just a small percentage of the population takes a specific deduction does not, in itself, increase the probability of an audit. The probability of an audit increases only when the ability to substantiate the deduction is suspect or the amount appears out of line compared to similar deductions. The facade easement donation must be substantiated in fact and value by IRS Form 8283. This form must be signed by a qualified appraiser and by the historic trust accepting the donation. There are a growing number of appraisers with expertise in the IRS guidelines for easement donations, a list of which can be made available by the trust.

The National Architectural Trust and its associates have facilitated over 400 donations and have received no reports of IRS audits triggered by the facade conservation easement donation.

Marketability. When considering whether a conservation easement might interfere with a property’s marketability, realtors with experience in selling historic properties in Washington, D.C., and New York City cite the following three overarching factors:

Effect on refinancing. Based on the experience of the National Architectural Trust, buyers have reported no resistance from lenders when seeking refinancing after donating an easement. Nor has the trust received reports from new buyers of property with donated easements that they faced challenges from mortgage lenders.

The Donation Process

Major actions required to complete the donation of a facade conservation easement include the completion of the appraisal, and obtaining consent from the lender when a mortgage exists on the property. The historic trust can provide the buyer with a list of qualified appraisers to choose from, and will facilitate discussions with the lender.

Appraisal. The property owner must have a written appraisal prepared within 60 days of the contribution date. This ensures an accurate fair market valuation. The value of the donation and tax deduction are also calculated from this appraisal. IRS deduction guidelines provide for a range between 10% and 15% of the appraised value of the property. The cost of an appraisal can vary, but it generally costs $1000 for an average residence, and is tax deductible as an “other miscellaneous” expense.

Subordination. When a mortgage is entered into before an easement is granted, the lender must subordinate its interest in the property to the enforcement provisions of the easement. A subordination agreement is necessary to guarantee that the enforcement rights and restrictions contained in the easement run with the property in perpetuity.

The regulation governing this requirement is found in Treasury Regulations section 1.170A-14 (h)(3)(v)(g):

(2) Protection of a conservation purpose in case of donation of property subject to a mortgage. In the case of conservation contributions made after February 13, 1986, no deduction will be permitted under this section for an interest in property that is subject to a mortgage unless the mortgagee subordinates its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.

Subordination is required whenever an easement is donated on a historic property that is mortgaged. In cases where there is more than one mortgage, all mortgages must be subordinated.

The subordination of the mortgage to the easement means that even if the property is foreclosed upon, the easement will not be extinguished. This is important, because IRS regulations provide that the charitable deduction may be disallowed if there is a strong possibility that the easement will be defeated by the occurrence of some future event (e.g., foreclosure).

The National Architectural Trust has submitted hundreds of subordination applications to over 80 different lending institutions. Only one submission was not granted, and this refusal was due to the particular situation, not to the lender’s general policy.

Historic Trusts

Historic trusts are not government agencies, they are not-for-profit organizations which must establish an endowment fund that will provide the not-for-profit organization the financial means to sustain itself while administering the conservation easement program and related historic preservation activities identified in its mission. A fair share contribution is calculated from realistic projections. Often a predetermined percentage of the tax deduction, this cash contribution is made by participating property owners and is also tax deductible.

Because historic trusts are becoming more proactive in the education of historic property owners and professionals in the accounting, legal, and real estate fields, the public is beginning to hear about the Federal Historic Preservation Tax Incentive Program for the first time. The first reaction is often one of skepticism because the opportunity sounds “too good to be true.” But after further investigation by the property owner and his or her tax and financial advisors, the reaction is usually like that of a recent donor, quoted in The New York Times as saying: “It feels like I got paid for making a contribution to the city I love.”

James M. Kearns spent more than 40 years in Third World development with the U.S. Agency for International Development and the World Bank. In 2001, he cofounded the National Architectural Trust, a not-for-profit organization dedicated to the preservation of historic properties that has facilitated over 400 contributions in New York and the Baltimore–Washington metropolitan area.

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