Preservation Easement May Have More Teeth Than Government's Historic Districts

Written by Posted On Monday, 18 November 2013 11:32

The amount of tax deductions available to homeowners who convey a conservation easement has just been questioned by a high Federal court. In a recent case, the First Circuit Court of Appeals sent a case back to the Tax Court to determine if a conservation easement in an historic district has any real value. (Kaufman v. IRS).

According to the court, "when the Kaufman's donated the easement, their home was already subject to the... (Boston) Landmark District rules that severely restrict the alterations that property owners can make to the exteriors of historic buildings... the Tax Court might well find on remand that the Kaufman's easement was worth little or nothing".

What is the basis for the deduction? Federal law permits a deduction based on the "difference between the fair market value of the encumbered property" before the donation and "the fair market value of the encumbered property after the granting of the restriction."

The First Circuit opinion is binding in some New England states as well as Puerto Rico. The opinion appears to be in sharp contrast to a case decided in June of 2011 by the District of Columbia Circuit Court. In that case, the court affirmed a lower court determination that 5 percent of the property was reduced as a result of the easement. That - at least here in the District of Columbia - is a benchmark.

The IRS - when challenging deductions claimed by easement donors - always makes the argument that since the property is in an historic district, the easement is worthless because it was already restricted by applicable preservation laws. The lower court in Simmons disagreed, pointing out that there are significant differences imposed by law as compared to those imposed by the easement. Since the IRS did not pursue that issue on appeal in Simmons, that is currently the law in the District of Columbia.

With two circuit courts appearing to issue opposite rulings, I suspect the matter will ultimately be brought to the United State Supreme Court for a final determination.

There are approximately 46 historic districts in Washington, such as Dupont Circle and Anacostia. There are numerous historic districts in Maryland and Virginia.. When you own property in one of these Districts, you are subject to a number of restrictions on what you can and cannot do to the outside of the building.

For example, the District of Columbia Historic Preservation Office advises that "owners of buildings in Washington's historic districts must have certain exterior repairs, alterations and changes approved by the Historic Preservation Review Board prior to undertaking them." In a publication entitled "Introduction to the Historic Preservation Guidelines", the office makes it clear that "if economically and technically feasible, repairs should be done so that the original material and elements remain intact. If repair proves not to be ... feasible, the building owner may then consider repairing the deteriorated material or element in a compatible substitute material.." However, there is a strong caveat: "the substitute material should have the same appearance, size, shape, texture, color and other defining characteristics as the original".

If your house is located in an historic district, and you are subject to all of these rigorous restrictions, why do people opt to grant a conservation easement (also called a facade or preservation easement) to such organizations as the L'Enfant Trust or the Maryland Historic Trust?

An easement is a restriction on your ability to use all of your property. It can be voluntarily granted by a homeowner - such as a conservation easement, or it can be imposed by law - an easement of necessity so that I can cross your land to get to the highway. The conservation easement provides a property right to the holder of the easement, and the homeowner (the grantor) is restricted from making changes to the exterior of the house without first obtaining permission from the easement holder.

Typically - indeed legally - the conservation easement holder must meet IRS standards and requirements. According to the IRS, a qualified organization is either a governmental unit, a publicly supported charitable, religious, scientific or literary organization, or an organization that is controlled by and operated for the exclusive benefit of a governmental unit or a publicly supported charity.

One such organization in Washington is the L'Enfant Trust. I asked Carol Goldman, President of the Trust, for an explanation as to any differences between living in an historic district and granting an easement to the Trust.

"The Trust's easements cover changes to a building's exterior that are not covered by D.C. historic preservation law," she said. As an example she pointed out that paint color selection is covered under the easement. In other words, when you grant an easement to the Trust, any changes that alter the appearance of the property must first be approved by the Trust. And, she pointed out, "even in areas where the requirements of the programs overlap, an easement donor must obtain the consent of both the Trust and a permit from the DC historic preservation office... The fact that DC may have issued a permit does not necessarily mean that the Trust will consent to the change as well."

There is yet another major difference between a conservation easement and the District's historic preservation law, namely enforcement. In testimony back in 2008 before the US District Court (DC) in the Simmons case, David Maloney - the District's Preservation Officer - candidly admitted that the District does not have the time to do routine surveys of all of the historic properties in the city. "Our office,", he pointed out, "is really responsive; it's not affirmative".

On the contrary, Ms.Goldman - testifying as a witness in that same case - told the court that "the Trust routinely writes all property owners every year;... we inspect every property every year. We photograph every property every year. The Trust also receives and reviews all building permit applications submitted to the District. All in all," she concluded, "enforcement is pretty active in the L'Enfant Trust."

There is one additional difference between the conservation easement granted to the Trust by a homeowner and the fact that a property is located in an historic district. The easement must be permanent. In recent years, based on challenges from the IRS, federal courts have struck down many homeowner claims for tax credits because their easements were not protected in perpetuity. For example, if there is a mortgage on the property, the lender must agree to subordinate its rights in favor of the holder of the easement. Otherwise, the lender could foreclose and potentially wipe out the easement.

Compare the permanence of a perpetual easement to District of Columbia law. The D.C preservation laws have not changed since they were enacted back in 1978. But, according to Goldman, they can be (and have been) side-stepped or watered down. If the DC office rejects a specific property, an appeal can be made to a representative of the Mayor who- after a full hearing -- has the authority to overrule the historic office.

Equally important, times, circumstances and politicians change, and there is always the possibility that the preservation laws can be dramatically amended or even repealed.

The conservation easement cannot be changed without the specific written consent of the holder - in our example the L'Enfant Trust.

However, the Judge in the Kaufman case was skeptical, suggesting that such an argument was a "vague suggestion in political, economic and aesthetic needs and tasted in a community" with no basis or reason given for expecting this to happen.

One of the legal requirements is that a recognized appraiser prepare an appraisal report explaining the amount of the projected loss based on the easement. A recent case rejected the claimed deduction because the grantor - who was himself an appraiser - did not get an independent person to prepare the required appraisal.

Additionally, under IRS regulations, the deduction for any such conservation contribution is limited to 50 percent of your adjusted gross income minus your deduction for all other charitable contributions. However, because of this limit, any unused deductions can be carried over to the following year.

Homeowners considering granting an easement should consult their own financial and legal counsel. Additional information: IRS Publication 526, "Charitable Contributions",; or

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Benny L Kass

Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of KASS LEGAL GROUP, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts.

Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.

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