VOCAL Neighbors

The facade donation charitable deduction - repost of information from December 7, 2004

Explanation of why I think that City-based district landmarking destroys the one federal incentive offered to homeowners to engage in historic preservation. I give you the background, bit to get straight to the point, look at the text below I've highlighted in bold purple:

An IRS publication from June 30, 2004, dealt with agency interpretations of charitable deductions for real property, whch covers facade donations. A link is provided below. Also provided below are statements by IRS officials regarding the June 30, 2004 publication and charitable contributions for facade donations.

http://www.irs.gov/pub/irs-drop/n-04-41.pdf

Note that the above IRS publication expressly states that:"If the donor (or a related person) reasonably can expect to receive financial or economic benefits greater than those that will inure to the general public as a result of the donation of a conservation easement, no deduction is allowable. Section 1.170A-14(h)(3)(i). If the donation of a conservation easement has no material effect on the value of real property, or enhances rather than reduces the value of real property, no deduction is allowable. Section 1.170A-14(h)(3)(ii)."
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My take on the above is that if a facade donation does not reduce the value of your property, then you get NO charitable deduction. You only get a charitable deduction for preserving your facade if it lowers your property value.

Here also are statements from the IRS regarding the above publication as published in the IRS News on July 28, 2004 (sorry, I don't have a direct link available, but I can fax or email you copies if you email me at vocalneighbors@hotmail.com):
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"IRS officials have responded to questions raised by Historic Rehabilitation Advisor, which sought clarification on several issues related to the recent publication of Notice 2004-41 on conservation easement deductions. The IRS issued Notice 2004-41 on June 30 [2004] advising taxpayers of its intention to disallow certain improper conservation easement deductions and levy penalties and excise taxes on rule breakers.

"IRS: The Notice states that the IRS is aware that some taxpayers may be claiming inappropriate deductions under Section 170 for conservation easements, and that deductions under Section 170 for conservation easements will only be allowed when all the requirements are met. The Notice applies equally to all types of conservation easements."

IRS Commissioner Mark W. Everson stated in a press release announcing the publication of Notice 2004-41 that the IRS "uncovered numerous instances where the tax benefits of preserving open spaces and historic buildings have been twisted for inappropriate individual benefit." [He continued:] “Taxpayers who want to game the system and the charities that assist them will be called to account.”

"IRS: As Notice 2004-41 points out, overvaluation of conservation easements is a major concern. However, it is not the only concern. Notice 2004-41 highlights several rules and requirements for the allowance of a deduction for a contribution of a conservation easement, and explicitly states that the rules discussed are just a few of the many requirements that must be met for a deduction to be allowed. All types of conservation easement deductions will be subject to scrutiny.

HRA posed the following question: "At the National Trust for Historic Preservation's 2002 Annual Meeting in Cleveland, OH, there was a session on conservation easements. One of the speakers said easements are typically appraised at 5-15 percent of the fair market value of the property - even higher in some cases. What's your [IRS's] reaction to that statement? Is that a fair "safe harbor?"

"IRS: There is no IRS safe harbor or any other IRS rule that provides that conservation easements are valued at 5-15% of a property's fair market value, or at any set percentage of a property's FIVE. When valuing a conservation easement, the rules of Sections 1.170A-1(c) and 1.170A-14(h) of the Income Tax Regulations must be applied on a case-by-case basis. The result may be higher or lower than the 5-15%, depending on the facts of the individual case.

"HRA: How does IRS determine whether a conservation easement dedication may be overvalued?

"IRS: The valuation of an easement must take into account several factors, such as: the current use of the property; an objective assessment of how immediate or remote the likelihood is that the property, absent the restriction, would in fact be developed; zoning, historic preservation, and other conservation laws in place that already restrict the property's potential highest and best use; whether the grant of the restriction either has no material effect on the value of the property or in fact serves to enhance, rather than reduce the property's value; whether the restriction allows for any development on the property, and the effect of the development; the access permitted by the restriction (in the case of an historic structure); whether the restriction has the effect of increasing any other property owned by the donor or a related person; and other factors (this list is not exclusive). The IRS applies these and other relevant factors to determine whether the taxpayer's valuation of the conservation easement is correct. For more information, see Sections 1.170A-14(h) and 1.170A-1(c) of the Regulations."

=====Here also is text from an article reporting on statements made by IRS counsel, Karin Gross, on facade donations (published on November 24, 2004, by the Bureau of National Affairs; anyone who wants the original send an email, and I'll send you my fax copy. Note that I provided a copy of this article to Alderman Daley last week):

“Karin Gross, acting branch chief of the Office of Chief Counsel (Income Tax and Accounting) [said] that there is a misconception among practitioners that donating the façade of an historic building automatically triggers an entitlement to a deduction for a percentage of the value of the house. Gross said that the issue that arises with respect to façade easements, as well as conservation land, is that, if the property is in a zoned area and cannot be modified, the value of the deduction may be very little. ‘You can’t get a deduction for a façade easement if you’re not giving anything up,’ she said, adding that it is an area in which the IRS thinks that there is some abuse.”

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My take on the above is that one of the factors that the IRS will use to determine the value of a conservation easement like facade donation, is by assessing whether the present status of the building is already restricted from its highest and best use by zoning, preservation status, and other conservation laws in place. Also, according to IRS counsel, you can't get a deduction unless you're giving something up.

We are repeatedly told that landmarking under the City's auspices means that the Landmarks Commission will be most concerned with preserving the facade of the building. That would seem to confirm that a facade donation will, under IRS rules, be viewed as already subject to restriction from its highest and best use as a result, and that given the restrictions that will already be in place on your facade, a donation of it will mean that you are not giving anything up. Hence, no deduction; hence, no more benefit, at the federal level, for preserving your facade once landmarked.

These obviously are complicated tax issues that should be discussed with competent legal counsel for anyone thinking about a facade donation.But in the larger view of things, it is wholly incorrect to suggest that landmarking a block or district will have no impact on people's ability to get a charitable donation for facade donations.

One issue that came up at a block meeting was that it seemed like there were insufficient economic incentives to encourage people to rehab and restore older buildings. Ironically, landmarking the district may reduce, if not eliminate, the one major economic incentive people have at the federal level to protect older buildings.

posted by The Grants @ 2:46 AM