Discussion: Facade Easements in Landmark Areas
There were a couple of articles in the New York Times in December about a movement to rein in the aggressive use of facade easements by owners of historic homes looking for a tax-break windfall. The value of the easement can equal up to 15% of the market value of the house and the tax…
There were a couple of articles in the New York Times in December about a movement to rein in the aggressive use of facade easements by owners of historic homes looking for a tax-break windfall. The value of the easement can equal up to 15% of the market value of the house and the tax breaks can be spread out over up to six years. Call us naive, but it hadn’t even occurred to us that we could profit by promising not to alter our facade–since we already are prevented from doing so by the Landmarks regulations. Clearly that is no barrier though: Basil and Eunice Whiting got a $189,000 break last year when they promised not to alter the facade of their 1850’s town house in the Cobble Hill Historic District–and several neighbors followed suit. We’d love to hear from people who have donated easements in already Landmarked areas–and from any lawyers or tax specialists who know whether this will be fair game this year.
Rushing for Tax Breaks on Historic Houses [NY Times]
Tax Breaks on Historic Houses Face Restrictions [NY Times]
Panel Advises Ending Breaks for Easements [Washington Post]
The granting of Façade Easement restricts any modifications to the façade so as to preserve it in perpetuity, and also provides substantial tax deductions to property owners. The Façade Easement Program consists of the granting of a Facade Easement that qualifies as a charitable contribution under the Federal Historic Preservation Tax Incentive Program, IRS Code (170-H). Easement values are determined by independent qualified appraisers and are typically in excess of 10% of the property’s value, and may be taken as a charitable deduction on city, state and federal income taxes. A preservation easement is a legal agreement designed to protect a significant historical, archaeological, or cultural resource. In the case of a facade easement, the historic property owner is assured that the building’s facade will be maintained, protected and preserved forever. Such an easement conveys the right of prior approval to a third party for any changes the owner may wish to make to the exterior of the property only.
Many qualified properties, are already subject to the New York City Landmarks Preservation Commission rules, laws, and regulations that already substantially restrict any modifications that can be made to the facade. The Federal Preservation Tax Incentive program was put into place because local ordinances, enacted to protect historic properties, failed on numerous occasions to protect historically significant properties that were demolished in the name of urban renewal. The loss of historic properties that reside within historic districts with local protective ordinances continues today at an alarming rate. Local preservation ordinances are discretionary governmental bodies that are often subject to change or variance due to political and financial pressure. For property owners looking to permanently protect their historic properties, one of the most effective legal tools available is the facade easement – a private legal interest.
When you donate a Façade Easement you give up part of your bundle of rights forever, that and other item’s in the Deed of Easement, are the fundamental differences between these two forms of preservation restrictions. The Facade Easement is an additional form of protection for qualified historic structures.
Emkay: if your property is already a local landmark or in a local landmark district, theorectically there is little or no impact on resale value. Landmarking has already diminished your right to alter your building, so the easement should not reduce the value any further. That’s one of the selling points for the groups that are agressively marketing easements, and one of the reasons the IRS is interested in whether or not you’ve actually donated anything of value.
This is more of a question than a comment. (Not having read the WP articles, but other stuff…) Is there any kind of significant evidence of what this does to resale value? Will the house forever be sold at 85-90% of its market value?
You hit the nail on the head – why does the easement on your facade have any value if you have no (or limited) control over changes to your facade? Its a questions the IRS has been looking at very seriously (together with hefty appraisals).
However – you do not give up all rights to make changes. It is up to the group holding the easement to administer changes – I believe that one group which has been aggressively marketing easements in NYC uses the LPC review as its level, so if LPC approves it, the easement holder will approve it too.
As a follow up, however, I would encourage anyone with interest to read the entire series of articles in the Washington Post. The paper certainly implies that at least some of these non-profits that receive the easements are less than vigorous in challenging proprty holders’ requests to do work on their facades — for example, one easement holder does not recall a single instance of ever suing to enforce the easement. If the easement is essentially illusory, than the whole program sounds more like a tax ddoge than an actual historic benefit.
While it’s true that if you are in a landmarked neighborhood such an easement likely would not further restrict your ability to work on the facade, the easement triggers an independent obligation not to touch the facade. In other words, even if you could get permission from LPC (either today or in the future) to make a modest change to the facade, the easement could still prevent that change. Or if NYC were to abolish or substantially modify the LPC system altogether, the property would still be controlled by the facade easement.
I won’t comment on whether this will be “fair game” or not in the upcoming year, because as the articles indicate, even without a change in the tax code, the IRS can challenge the amount of the deduction on the grounds that the easement is not actually reducing the value of the property.