Historic Preservation, Tax Deductions and the IRS: Proceed with Caution

Things I like:  Preserved historic building and landmarks, tax deductions and credits.

Things I Don’t Like:  Audits and litigation that could have been avoided.

I really like historic preservation; I like the effects of it, i.e. walking through the preserved Gettysburg battlefield or the cobbled streets of Georgetown.  I also like the law pertaining to historic preservation; it is a blend of municipal, state, and federal laws that ultimately affect our everyday lives.  When I was in law school, I took a seminar on historic preservation and it was one of my favorite courses.   I wrote my paper for that class on the part of historic preservation that is near and dear to our practice at Altman & Associates, tax credits and deductions.   In 2012, the IRS really liked historic preservation too, by that I mean the IRS was very active in disputing and litigating deductions for historic preservation easements.

For your information, there are federal and state tax credits and deductions available for historic preservation.  One way to get a tax credit is to engage a historic preservation project pursuant to the National Park Service’s procedures.   On the other hand, the deductions that are available are for granting what is called a historic preservation easement to a non-profit organization that will enforce that easement so that the grantor (property owner) does not in any way destroy the historic components of building on which the easement is granted.

Here is an example of the way a historic preservation easement works:  Mary owns a townhome in Georgetown, which, in certain parts, is a nationally recognized historic neighborhood.  Mary is willing to commit that she will not, nor any subsequent owner, make any changes to her townhome that would disrupt the historic nature of her home (like siding over the brick facade).  Mary then donates an easement, which grants a non-profit organization the ability to enforce Mary’s commitment to maintain the historic nature of her townhome.  Finally, Mary gets a tax deduction for the value of the easement.

The example above provides a perfectly viable basis for an income tax deduction; however, the value of that deduction and how it is substantiated (with a proper appraisal) is often something the IRS can and has actively disputed.  Thus, for those of us who like historic preservation, or simply like tax deductions, it is very important in this area to proceed with caution and proper knowledge of the changing case law because although I like historic preservation, I definitely do not like audits and/or litigation that were avoidable.

-  Michael Wolsh, Esq.

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