HR4 Contributions of Historic Preservation and Facade Easements
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Contributions of Historic Preservation and Façade Easements Summary: Section 1213 of the Pension Protection Act of 2006 (HR 4) enacts reforms and limitations for “qualified conservation contributions,” which include contributions of historic preservation and façade easements. Specifically, the Act revises the rules for contributions of easements on buildings located in a registered historic district. Effective Date: The changes with respect to façade easements are generally effective for donations made after July 25, 2006, except that the reduction for rehabilitation credit and the filing fee required for certain contributions are effective for contributions made after date of enactment (August 17, 2006). The disallowance of a deduction for structures other than buildings and for land in registered historic districts is effective for contributions made after date of enactment. How does this affect foundations? Private foundations do not qualify to receive contributions of conservation easements under current law. Community foundations generally have not accepted such gifts and under HR 4 likely will not be qualified to receive them because they do not have historic preservation as one of their purposes. However, foundations may be asked to make grants for the maintenance of a historic building and community foundations may have individuals or organizations who are interested in setting up a building maintenance fund for a designated organization. Foundations should be aware of the new requirements to ensure that grants are provided for the maintenance of only those buildings that comply with the new requirements. Summary of Basic Law What are the deduction limitations on contributions of “qualified conservation contributions”? Qualified conservation contributions are gifts of partial interests in property. In general, gifts of partial interests are not eligible for a charitable contribution deduction. Section 170(h) of the tax code provides for an exception for qualified conservation contributions. However, it should be noted that under the general quid pro quo rules applicable to all charitable contributions, there is no contribution deduction if the easement is a bargained-for-exchange, rather than a gift. What is the value of a conservation easement? In general, the donor must allocate to the conservation easement a portion of the basis of the underlying property. Therefore, the value of the easement is the value of the property before the easement minus the value of the property after the easement. As a general rule, the highest and best use of most real estate is developing it to its maximum permissible density. As a result, conservation easement on land that cannot be developed will have little value to give up and thus little or no charitable contribution deduction. Similarly a grant of an historic conservation easement in property located in a registered historic district may have limited value because the historic district’s rules limit changes to the building’s exterior. What is a “qualified conservation contribution? A qualified conservation contribution is a contribution of: 2 • a qualified real property interest • to a qualified organization • exclusively for conservation purposes. For example, contributions of conservation easements, historic preservation easements, and façade easements are qualified conservation contributions if they meet the rules. What is a “qualified real property interest”? In general, a qualified real property interest is: • the entire interest of the donor (other than a qualified mineral interest), • a remainder interest, or • a restriction (granted in perpetuity) on the use that may be made of the real property (these are generally referred to as “conservation easements”). What is a “qualified organization”? In general, qualified organizations include publicly-supported charities, and certain governmental units and certain supporting organizations. What is a “conservation purpose”? Qualified conservation purposes include one of the following: • preservation of land for outdoor recreation by, or the education of, the general public; • protection of natural habitat of fish, wildlife, plants, or ecosystems; • preservation of open space for the scenic enjoyment of the general public (and yield significant public benefit) or pursuant to a clearly delineated federal, state, or local government conservation policy (and yield significant public benefit), or • preservation of “historically important land areas” or a “certified historic structure,” where certified historic structure is defined as any building, structure, or land area which is: • listed in the National Register, or • located in a registered historic district (as defined in section 47(c)(3)(B) of the tax code) and is certified by the Secretary of the Interior as being of historic significance. Treasury regulations provide two additional requirements that should be kept in mind. The first applies to conservation of open space, and provides that a deduction of an easement intended to “preserve open space” will be denied if the donor retains rights to develop and use the land subject to the easement in ways that could interfere with its scenic quality or the governmental conservation policy being furthered by the easement. The second applies to easements for any conservation purpose, and provides that a deduction an easement will be denied if the easement achieves one of the four qualified conservation purposes but would permit the destruction of other significant conservation interests. New Limitations and Requirements Does the new law eliminate deductions for façade easements? Yes, deductions for so-called façade easements, where the restriction preserved only the front, or façade, of a building, are no longer available. The new legislation allows such easements only if the entire exterior of the building is preserved (see below). 3 Does the new law eliminate deductions for other property interests, besides façade easements? Yes, deductions with respect to a structure or land area located in a registered historic district (by reason of the structure or land area’s location in such a district) are also not allowed. The new legislation removes “structure” and “land” from the definition of “certified historic structure.” However, contributions of “historically important land areas” should not be affected. What are the new requirements for contributions of “façade” easements? The new legislation tightens the requirements on contributions of easements in registered historic districts. A charitable contribution deduction will be allowed only if the easement: • preserves the entire exterior of the building, “including the front, sides, rear, and height of the building, and • prohibits any change in the exterior of the building which is inconsistent with the historical character of the building’s exterior. In addition, the donor and the donee must enter into a written agreement certifying, under penalties of perjury, that the donee: • is a “qualified organization” (generally limited to public charities with some exceptions) whose purpose is environmental protection, land conservation, open space preservation, or historic preservation, and • has the resources to manage and enforce the restriction and a commitment to do so. Finally, the donor must submit a qualified appraisal with his or her tax return and also include photographs of the entire exterior of the building (to the extent practicable) and a description of all restrictions on the development of the building. Any donor who claims a tax deduction in excess of $10,000 for an easement on a building in a registered historic district must pay a new $500 filing fee. Does the new law reduce the deduction for easements for properties that have benefited from the rehabilitation tax credit? Yes. For any qualified conservation contribution, the amount of the deduction is reduced by the percentage that is equivalent to the proportion of tax credits for the previous five years allowed to the donor under section 47 of the tax code compared to the fair market value of the building on the date of the contribution. The information provided here is based on our continuing analysis of the bill. Every effort has been made to ensure accuracy of these documents. However, due to the complexity of the bill and the fact that many of these provisions introduce issues that are new to the Internal Revenue Code, please understand that this information is subject to change. The information is not a substitute for expert legal, tax or other professional advice and we strongly encourage grantmakers and donors to work with their counsel to determine the impact of this legislation on their particular situations. This information may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.