Question: I own an older house and have been asked by an organization to donate the facade of my house for historic preservation purposes. Is this still legal? What benefits do I gain by making this donation?

Answer: Yes, historic preservation easements are still legal, but you must exercise extreme caution when dealing with any organization that will accept such easements.

According to the L'Enfant Trust, a tax exempt not-for-profit organization located in the District of Columbia, a conservation easement (also known as a "facade easement") is "a voluntary legal agreement made between a property owner and a qualified organization that protects a significant historic or cultural resource."

This easement agreement is recorded among the land records in the jurisdiction where the property is located. Section 170 of the Tax Code requires that such easements be granted in perpetuity in order for the grantor of the easement to get any of the benefits from the donation.

What are the benefits?

The obvious one is that the Internal Revenue Service recognizes such donations as charitable contributions. Accordingly, the value of the donation can be deducted by the homeowner on his/her income tax return in the year that the donation is made.

What is this value? Here is where the problems arise. Typically, in the past, the IRS has allowed deductions in the range of 10-15 percent of the appraised value of the property. However, a couple of years ago, based on scandals and scams that were developing in this area, the IRS made it clear that it would carefully evaluate each donation on a case by case basis.

In fact, in July of 2004, the IRS issued Notice 2004-41, which dealt with Charitable Contributions and Conservation Easements. According to the Notice:

Taxpayers are advised that the Service intends to disallow all or part of any improper deductions and may impose penalties under #6662 (of the Internal Revenue Code) ... . In addition, the Service intends to review promotions of transactions involving improper deductions for conservation easements. Promoters, appraisers, and other persons involved in these transactions may be subject to penalties ...

It is also interesting to note that on February 7, 2006, when the IRS announced its "Dirty Dozen" tax schemes for 2006, the fifth scheme dealt with "Abuse of Charitable Organizations and Deductions."

A "contribution" of a historic facade easement to a tax-exempt conservation organization is another example. In many cases, local historic preservation laws already prohibit alteration of the home's facade, making the contributed easement superfluous. Even if the facade could be altered, the deduction claimed for the easement contribution may far exceed the easement's impact on the value of the property.

There is, of course, one additional benefit behind the potential tax savings. The basic purpose of a historic easement is to preserve the property in its present condition, thereby making sure that it cannot later be torn down and rebuilt with a high-rise apartment or condominium project. According to Steven T. Miller, Commissioner, Tax Exempt and Government Entities in the IRS, "conservation easements serve a vital role in American society. When conservation easements are appropriately used, they bring real and enduring benefits to the American public. They can safeguard -- and have safeguarded -- fragile ecosystems, critical watersheds, land bordering state and national parks and stunning views. We value this use of conservation easements. I want to do nothing at the IRS to hinder the continued and appropriate donation of conservation easements to provide these gifts to the public." (Remarks before the Spring Public Lands Conference, March 28, 2006, in Washington, D.C.).

What should you do? You first must understand that should you decide to donate the facade of your house to a conservation organization, you may significantly restrict your ability to make changes to your own house. The recorded easement basically states that you must preserve the house in its present condition -- forever.

You can, of course, make repairs where needed, but those repairs must be consistent with the design and appearance of your house at the time you made the donation.

If you plan to proceed, make sure that you are negotiating with a legitimate organization. Investigate the organization carefully. Review their website, talk to their staff, and -- more importantly -- confirm with the IRS and with your local consumer protection agency that this organization is not under investigation.

You will have to select an appraiser to prepare a comprehensive analysis of the value of the easement. This can be tricky. For example, if your house is already in an historic area, how much more loss of value will the historic easement create? You should also carefully investigate the credentials of your appraiser, to make sure that he is not currently being investigated by the IRS.

Yes, historic easements are still available, and can be taken for both commercial as well as residential properties. But you must do your homework carefully, before you shell out any money to an appraiser or to the non-profit organization.