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Friday, May 3, 2024
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Case Studies |
Historic Home Conservation Easement Deduction
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Case:
Jack Green was a real estate investor who purchased an historic residence in Charleston, South Carolina. He and his spouse Harper used the home as a second residence and spent most of the winter months in Charleston. Both of them loved the genteel atmosphere of the surrounding community and hoped that the area would maintain that ambiance.
Question:
Since Jack recently finished selling lots in a development on Long Island, he had a very large income this year and needed a substantial income tax deduction. Jack contacted his CPA and asked what options were available. How much could he give and deduct? What would be the best asset to give?
Solution:
Jack's CPA, Harry, was delighted to discuss charitable giving options with Jack. He noted that charitable deductions for gifts of cash could be used up to 50% of Jack's adjusted gross income. But gifts of appreciated property are normally deductible only to 30% of AGI, with a potential carry-forward of up to five years.
Fortunately, Harry suggested that Jack consider a conservation easement on the Charleston historic home. He asked, "Jack, do you plan to continue to live in the home during the winter months? Will you plan to keep the home in its current condition?"
Jack responded, "Yes, we plan to keep the home and use it during the winter. And not only do we plan no changes, we do not want to see it ever changed. It is a fine historic home."
Harry then explained that Jack and Harper could benefit from a gift of a conservation easement limiting the home to its present use. Normally, a conservation easement under Sec. 170 (f)(3)(B) is permitted if several tests are met. First, the conservation easement must be a real property interest, usually a restriction granted in perpetuity concerning the use of the property. Second, the recipient must be a "qualified organization." In this case, a South Carolina conservation charity was a qualified organization. Third, the gift must be made "exclusively for conservation purposes." Fourth, for an historic area home easement deduction, the entire exterior must be preserved, and any changes in the front, sides or rear "inconsistent with the historical character" are prohibited.
Jack and Harper were delighted. They contacted the South Carolina conservation charity and created the conservation easement on the Charleston home. An independent professional appraiser with credentials and experience in Charleston easements valued the gift at $195,000. Harry included the appraisal, photos of all four sides of the home, a $500 fee and the agreement with the conservation charity with their tax return. The agreement stated under oath that the conservation charity was qualified to receive the easement and had the resources and commitment to enforce the agreement.
Finally, Harry explained that conservation easements could be appreciated property, but still qualify for the more generous 50% contribution level with a potential carry-forward of up to 15 years. Because Jack and Harper were able to deduct the full $195,000 this year under the 50% of AGI limit, they enjoyed the tax savings now.
Jack was resting in the shade of the Magnolia tree in his back yard and enjoying an ice tea while he thought, "This is a beautiful area. It sure was nice of the government to give us the chance to preserve this beauty, while saving major taxes at the same time!"
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