Members of the Senate Finance Committee announced plans yesterday to stop millions of dollars in excessive income tax write-offs by property owners who promise not to change the facades on their historic properties.
Chairman Charles E. Grassley (R-Iowa) and ranking Democrat Max Baucus (Mont.) said they will introduce legislation to fine property owners, promoters and appraisers involved in donating facade easements that lead to undue tax deductions. The penalties would be retroactive to prevent homeowners from cashing in this tax season, before the reforms, they said.
_____Rich With History_____
Interactive: How historic easements work and who profits from them.
Graphic: The number of property owners applying to have their home or commercial building certified as contributing to a designated historical district has increased dramatically.
Map: Washington is the nation's leading city for historic facade easements, with easements protecting about 960 properties, many clustered in upscale neighborhoods.
Loophole Pays Off on Upscale Buildings (The Washington Post, Dec 12, 2004)
Tax Break Turns Into Big Business (The Washington Post, Dec 13, 2004)
Local Laws Already Bar Alterations (The Washington Post, Dec 12, 2004)
Why One Building Lost Its Character While Another Didn't (The Washington Post, Dec 12, 2004)
As Word Spreads, Clamor to Donate Grows (The Washington Post, Dec 13, 2004)
"Some people might be thinking they should rush to hitch up this horse before Congress closes the barn door," Grassley said in a statement. "I'll seek to pass legislation that will be effective today and will significantly increase the fines and penalties for those who contribute a facade easement and take an inflated valuation."
The senators said their action came in response to a Washington Post series this week that examined the rapid growth in such easements and the financial windfall they have bestowed on homeowners, nonprofit trusts and for-profit companies that process the easements.
Under the system, property owners pledge that they will not change the outward appearance of their historic homes without permission. They "donate" the promises to historic preservation organizations and deduct the gifts' cash value from their income taxes -- just as if they had given a threadbare couch to a charity thrift shop.
But preservation laws in the District and elsewhere already forbid unapproved changes in the exterior of historic homes. That means homeowners largely are collecting tax breaks for agreeing not to change something they are precluded from changing anyway.
The tax write-offs are supposed to represent the decline in the home's market value because of the facade restrictions, and they typically range from 10 to 15 percent of the property's value. But real estate specialists said the easements generally do not hurt resale values, making the tax incentives unwarranted. Homes with easements often are worth more than $1 million, and the write-offs routinely reach six figures, the Post analysis found.
Nonprofit trusts that hold the easements and the for-profit companies they work with have collected millions of dollars in related fees and donations in recent years.
Committee member Kent Conrad (D-N.D.) said he supports the proposed changes and joined Grassley and Baucus in calling for consideration of a cap on the size of easement-related deductions. "Reform legislation is clearly called for," said Conrad's spokesman, Chris Thorne.
Details of the committee's plan remain to be worked out, including how the Internal Revenue Service would pay for increased enforcement.
Richard Moe, president of the Washington-based National Trust for Historic Preservation, a congressionally chartered nonprofit, endorsed the reforms. Aggressive easement-promoting organizations have given the program a bad image, he said.
"We want to correct the abuse," Moe said. "I strongly support increased fines and penalties. This is going to slow down what has been a very aggressive process."
Grassley and Baucus called for the IRS to make audits of easement deductions a priority. Earlier this month, IRS Commissioner Mark W. Everson said in a statement to The Post that he had created a "special compliance project" targeting abusive easement write-offs.
"We have launched audits of individual donors over the last year," Everson said. "In addition, we will be taking a closer look at some of the recipient organizations."
Baucus stressed that he supports historic preservation but said he is concerned that promoters are taking advantage of homeowners unfamiliar with complicated tax provisions.
"This practice must stop," Baucus said. "The integrity of the historic preservation movement and the tax system rely on people following the rules, and these scam artists are thumbing their nose at the laws on the books."
Grassley emphasized that, while targeting abuses, he continues to support legitimate deductions that promote preservation.
"Overvalued facade easements are pretty obvious," he said. "For example, it's ridiculous for people in Georgetown to take tens of thousands of dollars in charitable tax deductions for agreeing not to put aluminum siding on their million-dollar brick houses when local laws and regulations already prohibit such activity."
Staff writer Albert B. Crenshaw contributed to this report.