Facade Easements: Worth the Risk of Audit?

Bob, I think a big part of Sunset Park falls into this category. From what I understand, Sunset Park is one of the largest Historic Districts in the Northeast but no parts have been given landmark designation. So the homeowners there may be able to take advantage of this tax benefit.

Posted by: guest at September 7, 2007 10:22 AM

As a tax attorney , I can assure you that this deduction is high on the list of IRS audit triggers. Whether defensible or not, who needs the scrutiny. On a million dollar home , a $150k(assuming 15%) charitable deduction, with all the attached paperwork, is going to stick out big time. So if you take the deduction, budget some audit defense fees into the equation. My advice: avoid.

Posted by: guest at September 7, 2007 10:44 AM

This is worth it. I did it for my home in Cobble Hill and got a $220K tax deduction. I was audited last year and the deduction held up. The audit took about 3 hours of my time. The key was that my appraisal was reasonable. Some people had crazy appraisals and I think they might have had a harder time. Jeb

Posted by: guest at September 7, 2007 11:15 AM

Bob, yes it's a better bet than the landmarked nabes, although it still comes down to a matter of valuation. So if the deduction passes muster, the valuation can still be deeemed excessive, and result in some penalties to pay on top of the taxes and interest. Plus other items in the reutrn will be scrutinized. Not for the faint of heart.

Posted by: guest at September 7, 2007 11:21 AM

I'm the 10:44 and 11:21 poster. What wBer wrote is right on target.

Posted by: guest at September 7, 2007 11:36 AM

Jeb, Were you able to take that $220k deduction all in one year or does it have to be amortized?

Posted by: guest at September 7, 2007 1:36 PM

I took it over a two year period. It ended up being about 80% in the first year. Jeb

Posted by: guest at September 7, 2007 2:16 PM

Bob Marvin – who made you the Conservation Easement Authority?
You claim to be a Landscape Photographer on your profile page.
Are you a land use attorney? A tax attorney? A preservationist?
Do you own property? Pay Taxes? Why would you profess to be an
authority on a topic you haven’t a clue about?

Posted by: guest at September 7, 2007 3:13 PM

Please do not speak for the Historic Districts Council, or suggest the HDC aligns itself with your ill informed notions. Your perceptions of Conservation Easements are wrong and you should not pretend to be an authority. In addition, you should not carelessly spread incorrect information regarding important, valid, and valuable preservation tools. Shame on you.

Posted by: guest at September 7, 2007 4:15 PM

Bob Marvin - It is Autumn 2007. The Conservation Easement Program was recently reviewed and reaffirmed by the Senate, Congress, and the President after a bill was put forth to essentially eliminate it. There are now better preservation standards, better appraisal standards, better incentives, and more transparency to the program. Please stop circulating old irreverent information. You are not helping the preservation movement.

Posted by: guest at September 7, 2007 4:25 PM

There is a case law history, which supports Conservation Easements that have been donated on properties within local historic districts that already have preservation ordinances. In all five cases the IRS lost and the donors won.

The fundamental difference is that:

1) City Ordnances are subject to change, subject to removal, subject to hardship clauses. Etc. etc.
2) Conservation Easements are private legal agreements which run in perpetuity.

Three recent examples of NYC Landmarks Ordinances failing to preserve important historic resources are as follows:

A) The Austin, Nichols warehouse on Kent Avenue in Williamsburg: The NYC Landmarks Designation was revoked by the New York City Counsel.
B) Fulton Ferry, Brooklyn - an art deco building which had been a city landmark for some 20 years was allowed to be demolished to make way for a park. and,
C) The Hearst Tower in Midtown was allowed to add a 50 story tower onto a landmarked building.

Conservation Easements clearly have value, even if the property is subject to local ordinance overlays. This issue was presided over in a court of law on five different occasions, not on a message board.

I work with the Connecticut Trust for Historic Preservation. The Trust for Architectural Easements are a group of serious and dedicated preservationists. TAE has also been active in a number of community support, good works projects, and grant giving to further the preservation movement (I believe HDC has been the beneficiary of some of these programs).

Posted by: guest at September 7, 2007 5:26 PM

Why aren't people jumping up and down with joy at the prospect of a deduction in the $220,000 range (as realized by Jeb at 11:15am and 2:16pm above)?! What am I missing? Surely canny (greedy) brownstoners aren't so afraid of an audit that they would leave this kind of cash on the table? Jeez, I had a friend who positively relished audits -- she just enjoyed a good fight, and over the years she definitely came out ahead of the IRS.

Posted by: guest at September 7, 2007 5:40 PM

The crux of the delemma for those contemplating this superficially atractive proposition, is that even with the new regulations and a very conservative appraisal of property value, it is still very difficult to prove a loss of value in an already landmarked area. Just because a licensed appraiser may give you an appraisal of a 5% - 10% or greater loss of value does not mean that the IRS will not challenge it, (case law of the late 80s and early 90s not withstanding)

Those who relish an afternoon or two with the IRS with their accountant in tow and the long uncertainty of possible future tax liability with interest and penalties should not be dissuaded, but there is no way that it would be economically feasible for an individual owner to take the IRS to court on this and come out ahead.

I would be far more impressed with the TAE If they had stepped up to the plate and defended the legitimacy of the existing easements that they had already been granted, the vast majority of which were made within the full letter of the law. Instead they have let their donors hang in the wind on their own to negotiate these points on a case by case basis with the IRS.

Posted by: guest at September 7, 2007 7:21 PM

I am somewhat confused by this discussion.

It seems like the deduction is legitimate and legally sound so long as the IRS accepts the appraisal on the property and the percentage of the deduction - meaning, you can't deduct 15% of a $2 million property if in fact it's only a $1.5 millon property and expect to get away with it. On the other hand, if you've actually got a $2 million property and can prove it's really worth that, you're ok. The IRS may challenge - so be prepared to have your paperwork in order.

I mean, congress sets these kinds of things up to encourage people to maintain historic neighborhoods for the long term. So the IRS's role isn't to change the intent of the lawmakers - it's just to make sure you don't exaggerate the value of the deduction (which would be true of any deduction.)

No?

Posted by: guest at September 8, 2007 11:39 AM

And to elaborate on what Bob is saying, it is pretty hard to meet the IRS's new standard of an estimation of values that uses the "before and after" analysis requiring market derived empirical evidence to measure any loss in value after the donation is made whether the property is in a historic district or not.

In other words, the requirement is to present comparable properties with a difference in sales price. The house with the easement needs to be lesser than a comparable house sold at the same time in the same neighborhood without the easement. This is no easy thing to prove and defend if challenged. As is Indicated on the TAE's own web site, the IRS now takes the position that valuation based on the Court Case History Measurement and IRS acceptable valuation range "methodologies" are either not relevant or are not recognized by the IRS.

Posted by: guest at September 8, 2007 1:49 PM

Bob – there you go again – pretending to be an authority on the appraisals of preservation easements or property values. Qualified independent third party appraisers are the ones who determine the value of these easements. Listed below is a summary of some of the issues that are taken into consideration. It is obvious you do not even know what a conservation easement actually is.

This is a summary of the Booklet Entitled APPRAISING EASEMENTS GUIDELINES FOR VALUATION OF LAND CONSERVATION AND HISTORIC PRESERVATION EASEMENTS Relative to the Difference Between Historic Preservation Easements, and Local Landmark Ordinances

The value of a Historic Preservation Easement is not derived solely from one’s ability or right to alter ones façade – a historic conservation easement will result in many other items which cause a loss in value.

Historic Conservation Preservation Easements typically contain the following provisions which clearly defines a unique set of conditions president which are not redundant to local ordinances, as follows:

1) Prohibiting demolition.

2) Prohibiting or severely limiting subdivision.

3) Prohibiting or limiting further construction or development. Depending upon the property, the easement may also prohibit or limit use changes.

4) Prohibiting changes to exteriors (and on occasion interiors) of historic or architecturally significant buildings depending upon their significance, barring changes to facades visible from public ways or prohibiting changes without prior review by the holding organization.

5) Replacement structure(s) must be constructed according to design plans approved by the easement holder.

6) Regulate changes to all facades, regulate how historic materials are replaced or repaired, prohibit or regulate placement of commercial or other signs and prohibit changes inconsistent with the building's historic character.

7) Requiring maintenance in conformity with agreed standards to protect the historic structure.

8) Maintenance in excess of that ordinarily anticipated for comparable structures is typically required.

9) The cost of conducting "interruptive maintenance" out of the ordinary building maintenance cycle to correct what, in economic terms, are relatively minor defects (such as repainting or repair of deteriorated brickwork, cornices or window elements more frequently than would be required by market conditions) must be considered.

11) Prohibiting dumping of trash.

12) Allowing for certain rights in the holding organization, including periodic inspection, review and enforcement rights.

13) Basis Adjustment: An Easement donation reduces the basis in subsequent years by a fraction equal to the ratio of the value of the easement donation divided by the value of the property just before the easement donation takes place. The Basis Adjustment will cause a reduction from the owner’s depreciation schedule and or increase one’s capital gain upon sale of subject property.

14) Bank or Lender Consent to the subordination of Lender Rights relative to the Conservation Purpose of the easement.

15) Requiring the owner to keep the property fully insured against casualty loss and to reconstruct improvements if they are destroyed. Again, not all preservation easements require the owner to insure the property or to replace it in the event of casualty.

16) Easements provide for judicial extinguishment in the event the historic structure is destroyed. The proceeds from the extinguishment are prorated at a fraction equal to the ratio of the value of the easement donation divided by the value of the property just before the easement donation takes place, and paid to the easement holding organization (not the landlord), and some Banks or Lenders require the owner to keep the property fully insured against extinguishment proceeds.

Easement encumbered properties within local historic districts should sell at a penalty relative to unencumbered properties in such districts because the easement typically imposes stricter controls than those contained in the usual preservation ordinance.

Easements often prohibit changes in property use or changes to significant architectural features while ordinances may permit such changes, subject to review and approval by a board of architectural review.

Further, unlike preservation ordinances, the easement typically contains no relief for "economic hardship" commonly found in governmental regulation of land use.

Easements are granted in perpetuity while historic district ordinances and local zoning practices change over time to reflect the dynamics of changing political, economic and aesthetic needs and tastes in a community.

An easement on an historic urban property is generally intended to preserve and conserve the historic, architectural, scenic and cultural values of a certified historic structure.

In the case of properties located in registered historic districts, the easement will also protect the historic district through limitations on uses that might jeopardize the architectural scale, style and sense of cultural identity of the district. The easement does this by restricting alteration and modification of the property in ways that would change its historic appearance or remove or replace historic building fabric.
= = =

Posted by: guest at September 9, 2007 11:47 AM

Percentage of donation? The easement donation is a non cash donation. There is no commission. Sorry - wrong again again and again.

Posted by: guest at September 9, 2007 4:19 PM

I was at an earlier TAE presentation in Manhattan. They said that there were IRS guidelines on appriasals in the works. It sounded like waiting for those guidelines will reduce the audit risk. The TAE guys did seems like snake oil salesmen or something out of Glenbarry Glenross, much more interested in collecting their fee than anything else. But they were up front about the IRS not liking the program (and the risks that creates).

Posted by: guest at September 9, 2007 8:50 PM

HISTORIC PRESERVATION AND ITS ISSUES

• Historic preservation: A major success story at all levels of government
o Contributes to a shared sense of history, attractive and stable neighborhoods, and economic development and urban revitalization

• Preservation is national policy, but most regulation happens at the local level
o Overseen by hundreds of landmarks commissions and historic district commissions

• Common misconception: All local landmarks commissions have equal, and total, control over the fate of local landmarks – in fact, they don’t
o Commissions’ financial and staff resources vary from modest to none
o Commissions’ legal authority varies from reasonably strong to non-existent
o Many localities still don’t have preservation ordinances of any kind

• Weak commissions: Advisory only
o Can only delay demolition (sometimes for as little as 45 days), not prohibit it

• Weak commissions: No commission decision final
o All decisions subject to review (planning commission, city council) and often overturned

• Even strong commissions can’t provide complete protection
o Some commissions permit inappropriate alterations and demolitions
o Some commissions lack enforcement resources
o Some commissions have two tracks, offering strong protection to some buildings and weaker protection to others
o Many commissions have hardship provisions
o Many commissions are threatened by changes to their laws
o Most commissions, with limited resources, can’t protect all eligible landmarks
o All commission are only as effective as their political support allows

• The price of preservation: The private cost of a public benefit
o Owners of historic properties bear the cost of preservation - lost development opportunities, extra costs of caring for historic property
o Some states and cities offer financial relief, but programs are spotty and inconsistent
o Sentiment against imposing private costs for land-use regulation is growing nationwide (e.g. Oregon’s Ballot Measure 37 in 2004)
o Preservation easements offer the only nationally available source of financial support for owners of historic properties

PART II: THE ROLE OF PRESERVATION EASEMENTS

• Preservation easements
o Created in 1976, part of a major national preservation initiative
o In exchange for a one-time federal tax deduction, owners voluntarily give up - in perpetuity - the right to demolish or make inappropriate alterations to their historic properties

• Easements help in two ways
o Help owners pay the private cost of the public benefit of preservation
o Provide additional protection, no matter how strong the local landmarks commission

• Easements avoid major preservation pitfalls
o Being national in scope, easements operate independently of local politics
o Being voluntary, easements eliminate the issue of owner opposition
o Being financially attractive, easements eliminate a major impediment to owner acceptance of preservation

• Many landmarks are protected by easements but not by local commissions
o Easements require properties to be listed in the National Register of Historic Places, a program administered by the states
o Local commissions designate landmarks according to their own schedules and priorities, but the State Historic Preservation Offices will consider any meritorious nomination
o Thanks to the financial incentive, many owners of locally unprotected landmarks have supported National Register listing and donated easements

• Easements are consistently available nationwide
o The only nationally available tool for protecting historic properties
o The only nationally consistent tool for helping owners bear preservation costs

• Value of easements long recognized by dozens of preservation organizations
o Accepted by national, state-wide and city-wide non-profits, and some local governments

• Easements are in tune with current trends in land-use regulation
o Easements eliminate issue of government compensation for lost value due to land-use regulations

• Easements are a bargain
o Easements currently number no more than 4000
o The cost of an easement, in foregone tax revenues, is paid just once, but the easement continues in perpetuity – over time, the cost amortizes to very little
o The cost of monitoring and regulating is borne not by the public, but by the non-profit easement-holding organizations - financed by property-owner donations

Posted by: guest at September 9, 2007 11:26 PM

I'm not sure why I'm extending the torture, except the hope that being very clear will reach someone. I did this!! Got a $220K deduction!! Was audited by the IRS - there were no visits to the IRS with accountant and lawyer in hand. I had to make a lot of xerox copies and my accountant wrote a cover letter. That's it. The deduction was allowed. I've lived in Brooklyn my whole life (53yrs). Who cares if TAE makes money managing these easements. I can think of a lot of worse things people do for money. I've put a great deal of resources into my 1840 browstone and have no problem with the US govt. helping to support historic preservation rather than a shopping mall. Some of the comments on this trail were really out to lunch. Jeb

Posted by: guest at September 10, 2007 4:00 PM

Wish me luck. . . my audit with the IRS started this week. Face to face meeting with a clueless and cynical auditor (unfortunately for me, I am his first conservation easement case). He kept saying "tax shelter". I corrected him several times - those are your words. A conservation easement it is a charitable donation and we didn't enter into this lightly. I have to provide a mound of paperwork. It was never explained by what was then the National Architectural Trust that there could be problems for a house such as mine that was in the National Registry, but also in a city landmarked neighborhood (Park Slope). In fact, it was even seen as a plus that the home was already landmarked, making an approval that much less of a hurdle to overcome for to label the house historically important.

We were asked a lot of questions like: what do you think your home has contributed to the public benefit? We answered our home is sought after for house tours annually, and that we have significant pride of ownership and are constantly approached for various events to take place at our home. We have had location scouts seek out the unique features of our home.

We were also asked how could we prove that the Trust is actually monitoring our home annually? We answered that this wasn't proof that we needed to provide.

I am truly sickened by all of this, and hope it goes away soon and we get to keep our deduction as we have contributed a lot of cash and our facade to the Trust. Somehow I think this is wishful thinking on my part!

When I spoke to the Trust about all of this this week, they indicated that a lot of cases are on going in our area and in MA. The IRS tactic seems to be going after individuals to disuade them from participating at all, but making an example out of those of us that played by the rules, to the T. I'm keeping annonymous in this blog, as am currently under investigation, and don't want to bias my clueless auditor further.

Any comforting words of advice would be very welcome!

Posted by: guest at September 15, 2007 12:55 PM

My audit is also underway. Is anyone using a tax lawyer that is familiar with these issues?

I am aware that in Mass., a certified appraisal professional has researched and assembled an impressive report detailing the comparisons between sales prices of comparable homes with and without easements. The report concludes an 8-11% diminution in value. It may make sense for the audited to band together to to commission such a study in Brooklyn. TAE might help support this, as it provided me with the Mass. report.

The comments above about the central issue being the absence of any diminution in value because of the landmarks ordinances already in place seem overly theoretical to me. Consider this practiclity:

two identical neighboring houses on the market for the same price. One has an easement one does not. The well-qualified buyer has the choice. Naturally, he will choose the one without--why have the added hassle everytime work needs to be done, the uncertainty, the risk to his own resale value, the weird encumbrance on your title, etc.? Besides, the benefit to you is if your NEIGHBORS are restricted--your house, you control. As the reasonably motivated seller with the easement, I would not hesitate to approach this well-qualified buyer with a reasonable discount to get his attention away from the house with no easement.

Does anyone think this scenario misses the point? Isn't this precisely what diminution in value is? Isn't the only question how much? If anyone wants to discuss this off-line 718 768 8430

Posted by: guest at October 24, 2007 9:57 AM