IRS Cracking Down on Easement Tax Dodge

As reported by the Post (which has turned the issue into quite a hobby-horse) the IRS is cracking down on a tax shelter that many Georgetowners may themselves have used.

The basic idea is this: property owners can give conservation easements to historical preservation groups which gives the non-profit the right to object to any changes made to the facade of the house. The donor of the easement can then theoretically write-off from his or her taxes the estimated reduction of the value of the house.

The problem, as first identified by the Post several years ago, is that homeowners grossly overestimate the value of the reduction in home value. The IRS argues that when a homeowner in a neighborhood like Georgetown encumbers his home with a facade easement, he’s not really encumbering his home with any more restrictions than already exist due to the aggressive preservation laws already in place.

One company that was pitching this shelter apparently was telling homeowners that they could write off 15% of the value of their home after giving the easement. The IRS thinks that’s a huge over-estimate. And now a federal judge agrees.

According to the government complaint, the defendants falsely told prospective customers that, in exchange for donating easements on their historic properties preventing façade alteration, the customers could claim charitable deductions equal to 10 to 15 percent of the property value, and that this range reflected official IRS policy. In fact, the complaint alleges, the IRS never had any such policy, and the actual value of façade easements, if any, must be determined on a case-by-case basis. The complaint also alleges that the defendants manipulated the easement appraisal process by steering donors to appraisers who the defendants knew would employ the 10-to-15-percent valuation method, leading to improper appraisals that yielded large tax deductions regardless of the easements’ actual effect on property value.

The IRS seems to be basing most of its case on the false statements. But it also appears to be assuming that easements on houses in places like Georgetown are kind of worthless given the presence of entities like the Old Georgetown Board, which already restrict what a homeowner can do. GM doesn’t think that’s quite right.

Easement holders can insist on many stricter requirements than the Old Georgetown Board can. For instance, an easement holder can insist that the property be maintained in a certain condition. The Old Georgetown Board can really only have its say when new work is proposed (or work was done without permission).

And in GM’s experience, easement holders are more likely to object to new construction on open space, whereas OGB and HPRB are often more amenable to it.

Another less significant but more practical difference is paint. The Old Georgetown Board has no authority over the color of a house. Easement holders do. We saw this when IceBerry painted the mullions of its windows bright green. The Foundation for the Preservation of Historic Georgetown owns an easement on the property, the Thomas Sim Lee building. They objected to the paint job and now the mullions are white.

And on another level, it’s simply yet another group that can weigh in with their own judgment on any proposed change.

So, no; GM doesn’t think the easements do nothing. But, yeah, they certainly don’t reduce the value of a home by 15%. If you’ve taken such a write-off, you might want to take another look at that before the IRS does.

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3 Comments

Filed under Preservation

3 responses to “IRS Cracking Down on Easement Tax Dodge

  1. Pingback: DC Link Roundup: Heard In The ‘Hood | Penn Quarter Living

  2. Maggie

    Even prior to this crackdown, You could bank on an IRS audit it you claim the easement. They no like-ie!

  3. Pingback: Update on Easements and Taxes | The Georgetown Metropolitan

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