Historic Façade Easement Deduction: What “Protected in Perpetuity” Requires in the Deed

A façade easement on a historic building is deductible only if the deed makes the restriction permanent and protects its preservation purpose forever. That requires subordination by any mortgage lender, a fixed proportionate share of the proceeds for the charity if a court extinguishes the easement, and reserved rights that cannot undercut preservation. A strong appraisal does not cure a defective deed, and a defective deed does not remove the valuation penalty if the claimed value was inflated.

In Del Monte, LLC v. Commissioner, T.C. Memo. 2026-107 (Oct. 19, 2026), the Tax Court denied two such deductions because of the proceeds clause.

Two perpetuity rules

A façade easement is deductible only as a qualified conservation contribution under 26 U.S.C. § 170(h). The interest must be “a restriction (granted in perpetuity) on the use which may be made of the real property.” The statute adds: “A contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.”

The lender must subordinate

If the building is mortgaged, 26 C.F.R. § 1.170A-14(g)(2) allows no deduction “unless the mortgagee subordinates its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.” Check that the lender signed a subordination, in the deed or a separate agreement, and read every reservation it kept.

In Del Monte, a lender’s retained priority to rents and foreclosure-sale proceeds did not defeat the subordination, because the charity had no claim to the income and a buyer would take subject to the easement. By contrast, in Palmolive Building Investors, LLC v. Commissioner, 149 T.C. 380 (2017), a lender’s prior claim to insurance and condemnation proceeds did, because the charity might go unpaid if the building were destroyed or taken.

The extinguishment-proceeds clause

If unexpected changes make preservation impossible or impractical, the purpose can still be treated as protected if a court extinguishes the easement and the charity uses all its proceeds consistently with that purpose. Under § 1.170A-14(g)(6)(ii), the owner must agree at the time of the gift that the charity holds a vested property right worth “at least equal to the proportionate value” the restriction bore to the value of the whole property at that time. That proportionate value stays constant: on a later sale, exchange or involuntary conversion, the charity must be entitled to at least that share of the proceeds, unless state law gives the owner the full proceeds from the conversion regardless of the restriction.

Our reading: Test the clause with the appraisal’s own numbers. The easement value divided by the property’s before value, the ratio the Del Monte court used, is the minimum share the charity must receive. If the clause leaves out any right the deduction counts, such as air or development rights, the share shrinks.

The Tax Court held the proceeds regulation procedurally invalid in Valley Park Ranch, LLC v. Commissioner, 162 T.C. 110 (2024), but the Sixth Circuit, where a Del Monte appeal would go, upheld it in Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022), so the Tax Court followed Oakbrook. It added that the statute itself requires, at a minimum, an unrestricted right to fair market value compensation on a later transfer or taking.

Our view: For a new deed, the safe harbor extinguishment language in IRS Notice 2023-30 is a useful comparison; the window to substitute it into existing deeds closed July 24, 2023.

Reserved rights and the donee’s remedies

Where the owner keeps rights that could impair the protected features, the regulation requires baseline documentation of the property’s condition before the gift, written notice to the charity before a reserved right is exercised, and the charity’s rights to inspect and to enforce the restrictions in court, including restoration. In Del Monte, a reserved right to rehabilitate under the Interior Secretary’s standards, with National Park Service or state approval, was consistent with preservation.

Façade rules that depend on the building

A certified historic structure under section 170(h)(4)(C) is either listed in the National Register or located in a registered historic district and certified as significant to it. For a district building, section 170(h)(4)(B) adds that the restriction must preserve the entire exterior and bar changes inconsistent with its historical character; the owner and charity must sign a written agreement, under penalty of perjury, certifying the charity’s purpose, resources and commitment to enforce; and the return must include a qualified appraisal, photographs of the entire exterior and a description of all development restrictions. Section 170(f)(13) adds a $500 filing fee when that deduction exceeds $10,000.

For contributions after December 29, 2022, a partnership’s historic-building easement is exempt from the 2.5-times-basis limit (section 170(h)(7)(E)), but above that ratio it is deductible only if the partnership’s return reports it as section 170(f)(19) requires.

A deed defect does not end the penalty question

A court still values a failed easement for penalties, as Del Monte did. Under section 6662, a claimed value of 150 percent or more of the correct value is a substantial misstatement (20% penalty), and 200 percent or more is gross (40%). For either valuation penalty, the part of that year’s tax underpayment caused by valuation misstatements must exceed $5,000, or $10,000 for a corporation other than an S corporation or personal holding company. Under section 6664(c)(3), reasonable cause is unavailable for a gross overstatement of charitable deduction property; for a substantial one, it requires a qualified appraisal by a qualified appraiser plus the taxpayer’s own good-faith investigation of value.

Our appraisal guide covers testing development assumptions.