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by Foxstone Financial on Oct 28, 2024
Realtors say that location is everything. In fact, they have a saying, 'location, location, location' stressing the importance of finding the right location can determine the potential for increased value of a property. We certainly see the logic of owning a piece of property closely situated to attractions or near beaches, mountains, lakes, downtown, etc. The same can be said for income tax planning; strategy, strategy, strategy is key. Melding real estate and tax reduction planning can be done simultaneously.
Historical Building Easements
The term ”historic preservation easement" is commonly used to describe a type of conservation easement – that is, a private, legal arrangement between a property owner and a qualified nonprofit organization or governmental agency for the purpose of protecting a historic property's conservation and preservation values. Historic Preservation Easement (HPE) protects historic structures by restricting changes to the exterior of the structure in perpetuity. Donating an HPE creates a charitable deduction, defined in IRC §170(h) and is valued by a qualified appraiser. Easement value is determined by reducing the Hypothetical (Highest and Best Use) Value by the Construction and Building Costs to determine the value of the “lost” development rights within the property.
How does this apply to the investor to reduce taxes? A historical easement provides up to a maximum 2.49x multiple on every dollar invested and is treated as a charitable deduction to reduce taxable income. The limit to this deduction is up to 50% AGI. For tax purposes, a $100,000 investment reduces taxable income by $249,000 and if you are in the 42% tax bracket, 37% federal and 5% state, that is a savings of $104,580 in tax. That income deduction may be enough to lower your effective rate on all your income.
I am happy to discuss this opportunity with you and how this strategy and many others can be implemented to save you money on taxes because like a realtor where location is key, strategy is paramount for tax planning. This strategy and others are key to keeping more of what you earn!
