Does Your Historic Home
Qualify for a Tax Break?

If you own a home that's certified as historic, you could take a tax deduction of up to 15% of the property's fair market value through what's known as a preservation easement.

What's the catch? You may find the long list of rules too restrictive.

The Federal Historic Preservation Tax Incentive Program, launched in 1976, is now attracting the attention of more homeowners. Taking part involves two initial steps. First you must enter into a binding agreement with a nonprofit or historic trust to essentially hand over control of your home's facade. By donating this easement to one such group, you can then take a charitable-gift federal tax deduction that's often equal to 10% to 15% of the home's assessed fair-market value, based on an appraisal. Other benefits of getting an easement sometimes include reduced state, estate, gift and local property taxes.

But it gets more complicated. The easement prevents the owner -- and all future owners -- from altering the home's exterior without the group's approval. These changes might include painting the home a new color, building an addition or anything that alters the exterior or appearance. Regular upkeep of the facade such as repainting the same color usually does not require permission.

When filing federal taxes, the homeowner must fill out paperwork with the appraiser's signature and certification from the nonprofit accepting the easement. Like any other charitable-donation deduction, it must not equal more than 50% of the taxpayer's adjusted gross income in one year. Therefore, the IRS lets eligible homeowners spread the deduction over up to six years.

"Most people want to buy something where they have their own control over it," says Sharon C. Park, chief of technical preservation services for the National Park Service. She advises homeowners to be fully aware of all the drawbacks before taking an easement. An easement restricts what homeowners can do with the façade of their home and can harm its resale value since future homeowners must abide by the rules without getting the tax break.

That said, preservation easements help communities protect their historic architecture and can be a rewarding way for residents to commit to upholding the historical character of their homes, says James M. Kearns, president of the National Architectural Trust, a Washington nonprofit that promotes historic preservation.

The nonprofit holding the easement will watch over the home for years to come and do regular checks to ensure the historic appearance of the home isn't changing. "It helps keep a community reminded of its past," he says. Less than 1% of qualifying homeowners have participated in the program, Mr. Kearns estimates.

Here's how qualifying for the tax deduction usually works. First a homeowner must find out if the property qualifies. It must be either listed in the National Park Service's National Register of Historic Places (www.cr.nps.gov/nr/) or located in a registered historic district and be of "historic significance." To find out, you can check the national register or call your state's historic preservation office. You may need to fill out some paperwork to get certified.

If a previous owner donated an easement on the home, you must follow the same rules but cannot claim the deduction. Owners with mortgages must also seek permission from their lender, which could charge a small fee.

Once eligibility is established, you'll have to find a charitable organization that accepts easements. This might be a local preservation group or one that works regionally or statewide. A PDF directory of easement-holding groups is on the Web at: www2.cr.nps.gov/tps/tax/easement.htm.

After the easement gets accepted, homeowners must get an appraiser to estimate the value of the home with and without an easement. The difference between the two values is considered the amount of the charitable donation and eligible tax deduction. The appraisal can cost an owner about $1,000, Mr. Kearns says, but is deductible as a miscellaneous expense on federal taxes. Any fees paid to the holding organization or lawyer fees are deductible, too.

One potential risk: Those already living in historic districts with strict rules on exterior renovations might not qualify for the deduction, the Internal Revenue Service warns. The reason: "If the property is already subject to local rules limiting or prohibiting development or change to the historic structure, the difference in value of the restricted property both before and after the easement is granted is likely to be zero or very close to zero," according to an IRS spokeswoman.

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