Demystifying the Federal Historic Preservation Tax Incentive Program

By Kearns, James M. | The CPA Journal, March 2003 | Go to article overview

Demystifying the Federal Historic Preservation Tax Incentive Program


Kearns, James M., The CPA Journal


Saving taxes and architectural history

In Brief

An Underutlized 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. Historice truste, 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 interested by preserving histroic 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.

Legislation

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. …

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