[Source: Paul Edmonson, National Trust Vice President & General Counsel] -- Many organizations and individuals involved in historic preservation have closely followed the increased public attention recently focused on the subject of preservation and conservation easements, particularly in the news media and in Congress. Those interested in this subject should be aware that significant legislative changes to address abuses in the area of façade easement donations were recently passed by Congress as part of an omnibus pension reform bill, H.R. 4. The bill, which includes a number of reforms in the charitable sector-as well as several enhancements to charitable giving incentives-was passed by the United States House of Representatives on July 28, 2006, and by the United States Senate on August 3, 2006. The bill is expected to be quickly signed into law by the President.
These changes constitute the first major reforms in the law relating to tax deductions for historic preservation easements in twenty-five years, and, generally, they should be welcomed by the preservation community. Many of the changes are logical reforms to address questionable practices by some easement holding organizations and promoters, as highlighted in recent years by Congress, the IRS, and the news media. For example, sections 1213 and 1219 of H.R. 4 would:
- Disallow deductions for façade easements that don't protect the entire exterior of a property;
- Prohibit easements that allow changes incompatible with a building's historic character;
- Require donor and donee to certify under perjury that the easement-holding organization is qualified to accept easements, and has the resources and commitment to manage and enforce the easement;
- Require the owner to provide the IRS more detailed substantiation to prove the value of the donation;
- Impose a new filing fee of $500 for easement deductions over $10,000;
- Increase overvaluation penalties for donors and impose new overvaluation penalties for appraisers; and
- Impose new qualification standards for appraisals and appraisers.
At the same time, H.R. 4 also includes several provisions that appear less logical or warranted, for example eliminating deductions for non-building structures or land areas in registered historic districts, and imposing a new reduction for easements on structures that have also qualified for the rehabilitation tax credit. All in all, however, the changes included in H.R. 4 should help to encourage higher standards of practice for easement holding organizations, easement promoters, and appraisers. Equally important, by reforming the law providing tax incentives for historic preservation easements-and rejecting an earlier congressional recommendation to substantially reduce or eliminate the deduction-Congress has soundly affirmed the validity of preservation easements and the federal tax incentives that encourage them. Indeed, H.R. 4 even includes a provision, section 1206, that actually expands the availability of the deduction for easements donated in 2006 and 2007, by increasing the amount available for deduction for most taxpayers in any given year (to 50 percent of adjusted gross income, versus 30 percent at present), and extending the carry-over period for deductions from five to fifteen years.
- The principal revisions included in H.R. 4 are summarized in detail here.
- Excerpted sections 1213 and 1219 from H.R. 4, as described above are here.
- Excerpted section 1206 of H.R. 4 (increasing deduction availability for 2006 and 2007) is available here.
- A redlined compilation of the Internal Revenue Code showing these changes is available here.