Conservation Easement Audits

Conservation and facade easements reduce taxes on a property while protecting its character for future generations, but the IRS frequently disputes the value of the deduction claimed. An attorney can help you determine what deduction you can support and respond effectively when the IRS challenges it.

What facade and conservation easements do

Both give up some of the property owner's right to change or develop the property. A facade easement restricts changes to a building's exterior, usually its street-facing side, and is granted to a conservation agency or historical trust so the exterior is preserved. It exists in perpetuity and generally means the structure will never be brought up to new building codes or retrofitted, beyond limited accessibility or safety work, though it must remain occasionally viewable to the public to qualify for the tax benefit.

A conservation easement gives up the right to future development, often to protect natural, scenic, or agricultural features, or to prevent development in historic areas. Historic properties and conservation areas often generate income through admissions or donations; the original donor does not pay income tax on those funds, and the charitable organization holding the easement is typically exempt as well.

The goal behind a facade easement is to turn a historic structure into something like a time capsule, protected so that people can see famous and historic properties well into the future. Donors who forgot to apply a tax credit to a prior return, or who are unsure how to report the purchase or sale of easement-restricted property, should raise those questions with an attorney before the filing deadline passes.

Potential tax deductions

Facade and conservation easements can produce deductions in several areas:

• A reduction in the year's income tax based on the changed value of the property
• A tax incentive that can be carried forward for up to 15 years
• Reduced estate taxes
• Benefits to property taxes

Disputes the IRS raises

The IRS commonly disputes the amount of the deduction claimed. Frequent grounds include:

• Disputing the value of the donated easement, including arguing the appraisal was inflated
• Failure to complete required paperwork and substantiation, including a full appraisal, before claiming the benefit
• Failure to comply with the perpetuity requirement the easement depends on
• Lack of evidence that the property is genuinely historic

If the property owner later uses the property in a way inconsistent with the easement's restrictions, the owner can lose eligibility for deductions already claimed. Common disputes a lawyer handles include proving an easement is valid, proving a structure is truly historic, and resolving questions about public viewing or accessibility.

The rules around both types of easement are complex, and property owners often struggle to understand where the IRS claims they deviated. If a dispute becomes a full examination, see responding to an audit for what documents the IRS typically requests. An attorney can help you understand the requirements and protect your right to the deduction.