A façade easement donations offers homeowners a significant tax deduction
By Paul K. Williams
Along with warmer weather and blooming flowers, spring also brings the dreaded process of filing personal income taxes. Each year, you or your accountant search for ways to increase tax deductions and lower your tax bracket to reduce the amount owed to the IRS. While donating clothes, furniture, or cash to a charity is a worthy cause and does help somewhat, the best way to substantially increase your tax deductions may be right in front of your nose-and in front of your house.
Any home in one of Washington's 26 historic districts holds the key to an incredible opportunity for substantial tax benefits through a historic façade easement donation. Simply put, a façade easement donation ensures that your home will retain its historical appearance, while you benefit from a substantial federal income tax deduction.
An easement donation is a voluntary legal agreement between a homeowner and a nonprofit organization, which will review and approve most changes to the primary façade of your home, a process similar to the restrictions already imposed on homes in historic districts by the city's Historic Preservation Review Board. Façade easements are held in perpetuity, so an easement remains on the title to ensure historic preservation of the property, even if the home is sold.
Significant Tax Savings
In addition to promoting historic preservation, homeowners who make a façade easement donation to a nonprofit organization may deduct a certain amount as a charitable contribution to a nonprofit 501(c)(3) organization. When the historic building, whether residential or commercial, is owned by several persons, the deduction is commensurate with the ownership interest. The deduction has been available for about 15 years, but has been discovered by more homeowners in recent years. About 700 home facades in Washington have been documented, so far.
The amount of the tax deduction is determined by the appraised value of the façade; typically, the IRS stipulates that the façade value is equal to 11 percent to 15 percent of the appraised value of the home. A homeowner with a house appraised at $500,000 would get a deduction for the façade easement of $55,000 to $75,000. For an individual in the 33 percent tax bracket, that can represent an actual tax savings of $18,150 to $24,750.
The L'Enfant Trust is by far the most popular of the organizations that accept façade easement donations. The L'Enfant Trust is a nonprofit in Washington, formed in 1978 to "facilitate both awareness and participation by individual property owners in the preservation of historic and cultural landscape." Besides meeting the IRS standards, another reason to donate a façade easement to the L'Enfant Trust is that your house will get a cast bronze plaque on the front wall of your house.
Some of the other nonprofits in the city that have recently been formed to accept easements have not withstood the rigors of an audit by the IRS and are not generally experienced in architectural review. Donating an easement donation to one of these organizations could potentially be revoked in the future if it fails to meet IRS qualifications.
Many people get nervous when they hear about easement donations, but it does not involve the nonprofit coming to the home and removing the façade-nor does it involve granting access to the public. Since the fronts of residential and commercial buildings located in historic districts are already subject to architectural review, the donation rarely reduces the actual resale value of the property. Also, an easement does not restrict the owner's rights, future use, or accessibility to the property.
How It Works
The first step in the process is to have the home appraised to determine the value of the intended easement for tax purposes. The appraisal must be done no earlier than 100 days before the donation date so that the value is current. And it is important to use a firm that specializes in easement donations and is willing to make future court appearances and supply necessary documentation, in case the easement is ever challenged by the IRS in the future.
After the appraisal is done, in order to qualify for a federal deduction, the property must be officially certified "historic" by the Department of the Interior. This step involves in-depth research into the home's past and provides the grantee with a detailed description of the home's architectural style and its context within the historic neighborhood.
The next step is to obtain legal compliance by the homeowner's mortgage lender and deed recordation. The IRS requires that mortgage lenders subordinate their rights to the rights of the nonprofit organization accepting the easement so that the nonprofit may effectively enforce the conservation purposes of the donated easement.
After compliance is obtained by the lender, the homeowner must then complete a detailed an easement donation application to the grantee, which includes high-quality exterior and interior photographs documenting the condition of the home's façade.
After the easement donation is accepted, the nonprofit will hold a settlement similar to a real estate closing. In order to help defray the expenses of administering the easement program and the yearly monitoring and photographing of all easement properties in perpetuity, the L'Enfant Trust requires a fair-share contribution by the homeowner.
The amount of the fair-share contribution is based on the easement donation value. The formula used by the L'Enfant Trust stipulates that homeowners contribute 10 percent of the first $10,000 easement value, 5 percent of the next $100,000, and 2 percent of the remaining value, with a minimum contribution of $1,500. This amount too is deductible as a direct contribution to a 501(c)(3) nonprofit organization, with discounts offered for applications made early in the calendar year.
Once the fair-share contribution is paid, the homeowner receives the necessary documentation, with the donation amount of the easement stipulated, to be filed with income tax forms. The tax deduction amount can be spread out over five years, but the amount deducted in one year cannot exceed 50 percent of the individual's gross income. The homeowner can continue to claim the donation if the property is sold. Consult an accountant or financial adviser and a real estate agent for more information.
Due to the considerable amount of paperwork and time involved in getting all the necessary approvals, many homeowners prefer to enlist the services of an experienced professional to guide them through the complex application process to ensure acceptance by the note holder, the façade easement grantee, and the IRS. It's also worth noting that acceptance may depend on expertise in historic research and photography. Professionals that specialize in easement donations charge approximately $4,000 to $5,000 for their services.
Paul K. Williams is the proprietor of Kelsey & Associates Inc., a historic preservation firm with offices in Washington and Baltimore that specializes in researching house history and facilitating façade easement donations. For more information about façade easement donations, see www.washingtonhistory.com/Easements or www.lenfant.org. Williams may be contacted at firstname.lastname@example.org.
Houses in the historic districts of the following local neighborhoods are eligible for a façade easement donation:
|Anacostia||Greater Fourteenth Street||Old Woodley Park|
|Blagden Alley/Naylor||Greater U Street||Shaw|
|Capitol Hill||Kalorama Triangle||Sheridan-Kalorama|
|Cleveland Park||Lafayette Square||Sixteenth Street|
|Downtown||LeDroit Park||Seventeenth Street|
|Dupont Circle||Logan Circle||Strivers' Section|
|Fifteenth Street Financial||Massachusetts Avenue||Takoma Park|
|Foggy Bottom||Mount Pleasant|