On May 23, 2008, Congress voted to override President Bush’s veto of H.R. 6124, commonly known as the Farm Bill. The Farm Bill had strong backing from preservation groups because it included a two year extension of tax incentives for conservation contained in the Pension Protection Act of 2006 which expired on December 31, 2007. The provisions of the Farm Bill continue the incentives retroactive to January 1, 2008 through December 31, 2009.
The sections provided below in reverse chronological order summarize the key events that led to the new easement legislation.
View a Section
- Congress Extends Incentives for Conservation
- Description of Conservation Incentives Recently Extended by Congress
- The President Signs New Easement Legislation
- Excerpted Sections 1213 and 1219 from H.R. 4
- Excerpted Section 1206 from H.R. 4
- Legislative Victory for Historic Preservation
- The Senate Submits Legislative Proposal
- The House of Representatives Submits Legislative Proposal H.R 4534
- June 23, 2005 Hearing by the House Ways and Means on Facade Conservation Easements
- June 23, 2005 Hearing by the House Ways and Means - IRS Opening Statement
- June 22, 2005 Panel on the Nonprofit Sector Issues Final Recommendations
- March 24, 2005 National Architectural Trust Notifies Senate Committee on Its Support of Program
- February 28, 2005 Major Historic Preservation Organizations Show Support for Conservation Easements
- February 18, 2005 Advisory Council on Historic Preservation Passes Resolution Supporting Preservation Easements
- January 27, 2005 Study Proposes Limiting Tax Deductions
- December 17, 2004 Announcement by Senator Grassley
Congress Extends Incentives for Conservation
On May 23, 2008, Congress voted to override President Bush’s veto of H.R. 6124, commonly known as the Farm Bill. The Farm Bill had strong backing from preservation groups because it included a two year extension of tax incentives for conservation contained in the Pension Protection Act of 2006 which expired on December 31, 2007. The provisions of the Farm Bill continue the incentives retroactive to January 1, 2008 through December 31, 2009.
H.R. 6124 can be viewed in its entirety on the USDA website.
An excerpted version that consists of the H.R. 6124 Title page and Section 15302 Title: Two Year Extension of Special Rule Encouraging Contibutions of Capital Gain Real Property for Conservation Purposes can be viewed in the PDF below.
H.R. 6124 Section 15302
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Description of Conservation Incentives Recently Extended by Congress
A description of the incentives extended may be found in Internal Revenue Code section 170(b) or by opening the attachment to “Excerpted Section 1206 from H.R. 4” below
Excerpted Section 1206 from H.R. 4
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The President Signs New Easement Legislation
On August 17, 2006, the President signed into law H.R. 4. This new legislation, now P.L. 109-280, will increase incentives for property owners to donate conservation easements. The legislation also includes provisions to curb potential abuses.
The Trust for Architectural Easements applauds Congress for taking meaningful action to reaffirm the value of the historic preservation easement program and to expand its usefulness as a vital tool in the campaign for voluntary preservation. The Trust also supports the new provisions designed to minimize the potential for abuse.
Added Incentives
As an incentive to encourage contributions of real property for conservation purposes, the legislation raises the deduction limitation for certain non-cash, capital gain donations, including donations of qualified historic preservation easements, from 30% of adjusted gross income to 50% of adjusted gross income. Further, in the event the fair market value of the qualified historic preservation easement contribution exceeds 50% of the donor's adjusted gross income in the year of the donation, the new legislation increases the number of years over which a donor may carry forward any excess qualified conservation contribution from five years to fifteen years.
These provisions only apply to qualified contributions made after December 31, 2005 and before January 1, 2008. A donation that qualifies for this provision may apply its formula in any carry over years beyond 2007. The Trust will work with other preservation organizations to encourage Congress to extend these provisions or make them permanent.
Reforms
The new law includes a number of amendments to Internal Revenue Code section 170(h) tightening the requirements for making qualified conservation contributions of certain easements located in registered historic districts. These reforms are intended to minimize the potential for abuse. These changes include the following requirements for historic preservation easements in historic districts to be tax deductible:
• A historic preservation easement must preserve the entire building exterior, including the space above the building, the sides, and the rear; rather than only those sections of the historic building that are visible to the public. This requirement will be effective for donations made after July 25, 2006.
• A historic preservation easement must prohibit any changes in the exterior of the building that are inconsistent with the building’s historic character. This requirement will be effective for donations made after July 25, 2006.
• The donor must include a qualified appraisal of the property donation, photographs of the entire exterior of the building and a description of all restrictions on the development of the building. This requirement will be effective for donations made in 2007.
• For any historic preservation easement donation valued in excess of $10,000, the donor will be required to pay a filing fee to the Internal Revenue Service of $500. This requirement will be effective for donations made in 2007.
• The written agreement evidencing the historic preservation easement must contain a pledge from the donee organization that it has both the resources and the commitment to effectively manage and enforce the terms of the easement in perpetuity. This requirement will be effective for donations made after July 25, 2006.
The new law amends the defined meaning of "qualified appraiser" and "qualified appraisal."
• The new law defines a qualified appraiser as an individual who (1) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements to be determined by the IRS in regulations; (2) regularly performs appraisals for which he or she receives compensation; (3) can demonstrate verifiable education and experience in valuing the type of property for which the appraisal is being performed; (4) has not been prohibited from practicing before the IRS by the Secretary at any time during the three years preceding the conduct of the appraisal; and (5) is not excluded from being a qualified appraiser under applicable Treasury regulations.
• In addition to the current definition of a “qualified appraisal” contained in the Treasury Regulations, a qualified appraisal must be prepared by a "qualified appraiser" (as newly defined) in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed by the IRS.
The new law lowers the threshold for imposing accuracy-related penalties on taxpayers and establishes a new civil penalty which may be assessed against appraisers.
• Under the new law, the threshold for a “substantial” valuation misstatement relating to an underpayment of income tax is lowered from 200 percent to 150 percent of the amount determined to be the proper valuation. The threshold for “gross” valuation misstatement relating to an underpayment of income tax is lowered from 400 percent to 200 percent of the amount determined to be the proper valuation. The penalty amounts remain unchanged. The penalty is 20 percent of the underpayment of tax resulting from a "substantial" valuation misstatement and is 40% of the underpayment of tax resulting from a "gross" valuation misstatement.
• In addition, the new law removes the "reasonable cause" exception to accuracy-related penalties in the event of a gross valuation misstatement, with respect to any contribution of a historic preservation easement.
• A new civil penalty will be imposed on an appraiser who prepares an appraisal that the appraiser knew or “reasonably should have known” would be used in connection with a tax return, if such appraisal results in a substantial or gross overvaluation on a tax return. The penalty is equal to the greater of $1,000 or 10% of the understatement of tax, up to a maximum of 125% of the gross income derived from the appraisal.
• The new law further provides that the penalty does not apply if the appraiser establishes that it was "more likely than not" that the appraisal was correct.
• The new taxpayer and appraiser penalty provisions will apply to tax returns filed after July 25, 2006.
You may view the complete text of the H.R. 4 Pension Bill at http://waysandmeans.house.gov/media/pdf/taxdocs/pensiontextpt1.pdf
Excerpted Sections 1213 and 1219 from H.R. 4
Section 1213: Reform of Charitable Contributions of Certain Easements in Registered Historic Districts and Reduced Deduction for Portion of Qualified Conservation Contribution Attributable to Rehabilitation Credit
Section 1219: Provisions Relating to Substantial and Gross Overstatements of Valuations
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Excerpted Section 1206 from H.R. 4
Section 1206: Encouragement of Capital Gain Real Property Made for Conservation Purposes
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Legislative Victory for Historic Preservation
Welcome reforms to the Federal Historic Preservation Tax Incentive Program were included in the pension reform legislation (Public Law 109-280) signed into law by the President on August 17, 2006. As an incentive to encourage conservation, the legislation raises the deduction limit for contributions of capital gain real property made for conservation purposes, including donations of historic preservation easements, from 30% of adjusted gross income to 50% of adjusted gross income, and increases the number of years over which a donor can carry forward any excess qualified conservation contributions from five years to fifteen years. This provision only applies to qualified contributions made after December 31, 2005 and before January 1, 2008.
To understand more about how this new legislation affects historic preservation easements, please download the attached PDF document.
Summary of New Legislation
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The Senate Submits Legislative Proposal
On November 16, 2005, the Senate issued draft legislation containing provisions related to the donation of façade conservation easements. If passed into law as currently proposed, the following additional criteria will be added to the rules establishing the tax deductibility of façade conservation easement donations.
To be effective on November 15, 2005:
• The easement must preserve the entire exterior of the building (including the front, sides, rear, and height of the building) and not only those sections of the building that are visible to the public. As before, the easement must prohibit any change in the exterior of the building which is inconsistent with its historical character.
To be effective beginning in the calendar year following enactment:
• The taxpayer must include with the taxpayer's return (i) a qualified appraisal of the donation (within the meaning of Section 170(f)(11)(E) of the Code), (ii) photographs of the entire exterior of the building, and (iii) a description of all restrictions on the development of the building.
To be effective 180 days after enactment:
• The taxpayer shall be required to pay a filing fee to the IRS equal to $500.00 with respect to any façade conservation easement donation in which a deduction is claimed in excess of the greater of (i) 3% of the fair market value of the building, or (ii) $10,000.
Donors planning to make façade conservation easement donations following November 15, 2005 should contact their tax advisors to discuss the implications of this proposed legislation. For those donors that plan to make their donation to the National Architectural Trust, the Trust invites donors and their tax advisors to contact Trust executives at their DC office with questions or concerns.
Draft Legislation - Tax Relief Act of 2005 Section 314
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The House of Representatives Submits Legislative Proposal H.R 4534
On December 14, 2005, the House of Representatives issued draft legislation containing provisions related to the donation of façade conservation easements similar to those proposed by the Senate in the Tax Relief Act of 2005.
Donors planning to make façade conservation easement donations following November 15, 2005 should contact their tax advisors to discuss the implications of this proposed legislation. For those donors that plan to make their donation to the National Architectural Trust, the Trust invites donors and their tax advisors to contact Trust executives at their DC office with questions or concerns.
Draft Legislation - H. R. 4534
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June 23, 2005 Hearing by the House Ways and Means on Facade Conservation Easements
The House Ways and Means Oversight Committee held a hearing on façade conservation easements. Included on the panel was Steven McClain of the National Architectural Trust. The Trust’s opening statement summarizing the Trust’s views as to the importance of the program is provided below.
National Architectural Trust Opening Statement by Steven McClain
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June 23, 2005 Hearing by the House Ways and Means - IRS Opening Statement
The House Ways and Means Oversight Committee held a hearing on façade conservation easements. Included on the panel was Stephen Miller, IRS Commissioner for Tax Exempt and Government Entities. The IRS’s opening statement summarizing its views is provided below.
IRS Opening Statement by Stephen T. Miller
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June 22, 2005 Panel on the Nonprofit Sector Issues Final Recommendations
On September 22, 2004, the Senate Finance Committee encouraged Independent Sector, a nonprofit, nonpartisan coalition of approximately 500 national charities and foundations, to assemble an independent group of leaders from the charitable sector to consider and recommend actions to strengthen governance, ethical conduct, and accountability within public charities and private foundations. The Senate Finance Committee leadership requested a final report in the spring. This report is available in its entirety on the Senate Finance Committee website. The section of the report with recommendations for conservation easement holding organizations is provided below.
Final Recommendations by the Panel on the Nonprofit Sector
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March 24, 2005 National Architectural Trust Notifies Senate Committee on Its Support of Program
In response to the Congressional Joint Committee of Taxation proposal issued on January 27, 2005, several leading governmental and private organizations in the historic preservation community have sent letters to the Chairmen and Ranking Minority Members of the Senate Finance Committee and the House Committee on Ways and Means stating their support for the conservation easement program.
The National Architectural Trust states that "the elimination and/or reduction in the tax incentives for the donation of conservation easements on historic properties would prove a major step backward in the historic preservation effort."
National Architectural Trust Notifies Senate Committee on Its Support of Program
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February 28, 2005 Major Historic Preservation Organizations Show Support for Conservation Easements
In response to the Congressional Joint Committee of Taxation proposal issued on January 27, 2005, several leading governmental and private organizations in the historic preservation community have sent letters to the Chairmen and Ranking Minority members of the Senate Finance Committee and the House Committee on Ways and Means stating their support for the conservation easement program.
A joint letter from the respective presidents and chairman for the National Conference of State Historic Preservation Officers, the National Trust for Historic Preservation and Preservation Action states that their “organizations are deeply concerned about proposals in the report that would effectively dismantle longstanding Federal tax incentives for conservation easements used for historic preservation and land conservation.”
Letter in Support of Conservation Easements
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February 18, 2005 Advisory Council on Historic Preservation Passes Resolution Supporting Preservation Easements
On February 18, 2005, the Advisory Council on Historic Preservation, the Federal agency charged with promoting the preservation, enhancement, and productive use of America’s historic resources and advising the President and Congress on national historic preservation policy, passed a resolution supporting easements as an effective and needed preservation tool. The council noted that “encouraging property owners to voluntarily preserve their historic properties through the use of preservation easements supports the Administration’s commitment to encouraging citizen stewardship and cooperative conservation....”
You may view a summary of the Council's resolution and comments at: http://www.achp.gov/news-2-05achpbizmtg.html.
Resolution on Tax Benefits for Preservation Easements
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January 27, 2005 Study Proposes Limiting Tax Deductions
On January 27, 2005, the Congressional Joint Committee of Taxation issued a 435 page proposal for limiting tax deductions. This report covers a broad range of topics including the deductibility of interest on home equity loans, charitable donations of clothing and household goods and charitable donations of conservation easements on land and historic buildings.
The proposal suggests the passing of legislation that “eliminates the charitable deduction with respect to façade and conservation easements relating to personal residences (see Note 1), substantially reduces the deduction for all other qualified conservation easements (see Note 2) and imposes new standards on appraisals and appraisers regarding the valuation of such contributions.” The proposed effective date of these changes if passed, is “for contributions made in the taxable years beginning after the date of enactment.”
Note 1: Personal residence is defined in the proposal as a property that is used “by the donor or a family member of the donor as a personal residence.”
Note 2: The reduction in the deductibility of all other qualified easements (primarily income-producing property) is defined in the proposal as “the lesser of (1) five percent of the fair market value of the structure…; or (2) 33 percent of the value of the façade.”
Study Proposes Limiting Tax Deductions
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December 17, 2004 Announcement by Senator Grassley
Senator Chuck Grassley, chairman of the Committee on Finance, and Senator Max Baucus, ranking member, are planning to put forth legislation early next year to reform façade conservation easement legislation to prevent excessive easement valuations. The Senators stated that they plan to make this legislation effective as of December 17, 2004.
Announcement by Senator Grassley
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