The valuation of properties with historic preservation easements can be a professionally fulfilling and lucrative area of work, but fewer and fewer appraisers are tackling this field because they’re worried about increased Internal Revenue Service audits, according to an article published in the Third Quarter 2012 issue of Valuation magazine.

Valuation magazine is the quarterly membership publication of the Appraisal Institute, the nation’s largest professional association of real estate appraisers. The materials presented in the publication represent the opinions and views of the authors and not necessarily those of AI.

A historic preservation easement is a voluntary legal agreement that enables property owners to establish certain preservation restrictions while retaining possession and use of the property. The benefit to donating a historic preservation easement comes from the owner’s ability to qualify for a (sometimes very significant) tax deduction.

However, it’s that tax deduction and the IRS’s increased vigilance that has not just cooled but practically frozen interest in this type of appraisal work. An IRS official said that there currently are some 200 cases over disputed tax deductions related to historic preservation and conservation easements in United States Tax Court.

Richard Roddewig, MAI, president and co-founder of Clarion Associates, Inc., in Chicago, says there was a burst of activity in taking historic preservation easements from the late 1990s through early 2000s because many nonprofit organizations that received donations of easements pushed homeowners to take the easements and then claim a 10 to15 percent property value loss on their taxes — as the IRS rule stated.

Unfortunately, there was no such IRS rule.

That disconnect came from misunderstanding about IRS guidance on diminution of value that routinely and incorrectly was interpreted as a rule.

The IRS’s own market studies of easement properties in major cities revealed that such easements rarely result in a substantial difference between ‘before and after’ property values. The findings revealed that reduction in values might drop 3 to 5 percent, certainly not 10 to 15 percent.
 
Read the Valuation article.