Valuation of Facade Easements

The tax code allows a deduction for any charitable contribution.  That includes a qualified real property interest donated to a charity exclusively for conservation purposes.  A qualified real property interest is a restriction granted in perpetuity on the use which may be made of the property, including an easement.  In 2004, the Congress added reporting and substantiation requirements for non-cash charitable contributions and, under the Pension Protection Act of 2006, the Congress increased penalties for inaccurate appraisals and new definitions of qualified appraisals and appraisers for taxpayers claiming charitable deductions.  In recent years, IRS has become increasingly concerned about abuses involving donated easements – it primarily concerns valuation.

Some practitioners and taxpayers have believed that if a donor donates a façade easement, the donor is automatically entitled to take a percentage (typically between 10 percent and 15 percent)) of the value of the property for the charitable deduction.  That is not the case.  IRS has recently pointed out that an appraiser must value the easement by determining the values of the underlying fee interest both before and after the contribution, with the easement valued at an amount equal to the difference.  There is no generally recognized percentage by which an easement reduces the value of property.  So, unless there is a substantial record of sales of easements comparable to the donated easement, IRS will not accept an appraisal that does not value the property both before and after the donation to substantiate the deduction.  CCA Ltr. Rul 200738013 (Aug. 9, 2007).