Every year when my school and property tax bills appear in the mail, I can't help but cringe. In my town a 6 percent increase in the school budget is considered a miracle, while this year 9 percent–plus is on tap. Anything that eases the tax burden would be welcome, though sometimes it seems moving Tom, Katie, and Suri into the guesthouse and declaring a religious tax exemption may be the only way out of the spiral. There are some things, however, a homeowner can do to reduce those bloated bills, particularly for important or historic properties.
Doing Well By Doing Good
If you own a piece of land that is eligible to be subdivided into smaller parcels or a home in a landmark area, two particular strategies to consider are conservation and façade preservation easements. Each involves giving up development rights to charitable organizations formed for the sole purpose of protecting important open space or maintaining the character of historic neighborhoods. My experience with two such donations has been very positive. While helping preserve two beautiful properties, I earned some significant tax savings.
Granting a historic or scenic easement to a local organization or land trust requires giving up the right to subdivide or further fully develop your property. According to Boston attorney Stephen J. Small, the author of federal income tax regulations that govern conservation easement donations, "If you own a piece of valuable land with the right to subdivide and develop it, and work with a legitimate conservation organization, the rules are pretty clear." In one instance the family of an elderly woman about to sell her home donated such an easement to the town's historic preservation society, permanently limiting a parcel of land that, according to local zoning laws, could readily have been broken up into lots for three or four large homes. The easement agreement allowed only one primary residence on the property. The family in turn received a federal income tax deduction for lowering the appraised value of the property, which might have sold for much more to a developer.
Similar easements are accepted by a wide range of local and even national land trusts. Federal laws, set to expire at the end of this year unless Congress renews them, significantly increased the deduction that can be taken—from 30 percent to 50 percent of adjusted gross income—as well as the number of years over which the deduction can be carried forward, from five to 15. It's important to note, however, that these donations are permanent, must be made to an established organization, and absolutely require valid and defendable appraisals of the property value and the deduction.
Some states also offer tax credit programs for such donations. New York State, for example, recently approved up to $5,000 in annual tax credits to those whose properties are subject to some such easements. In all cases, have your accountant and a lawyer review the paperwork, avoid deals that sound too good to be true, and steer clear of organizations and appraisers who promise a specific deduction amount in advance.
The second approach, donating a façade easement on a property in a historic area to a trust, is a similar though more controversial program. The owner permanently gives up the right to change the appearance of the building's façade (which can make repairs and restorations more expensive), is usually asked to make a cash contribution to cover the costs of the monitoring, stewardship, and enforcement associated with the easement, and can receive a deduction for the cash and the demonstrable loss in property value. "Façade easements have been around a long time," says Small, "but some very aggressive promoters have caught the attention of the IRS, which is now very sensitive to such transactions. These easements can have value, but this is an area where the landowner has to be particularly careful. Proceed with caution."
The net effect of a properly structured and executed easement gift is not just an income tax break but could also be an ongoing reduction in your property taxes. Says Small, "Logically, the value of the rights that go with your property is included in the tax assessment. If you give away those rights, it should follow that you also reduce the value of the property. Lower value should mean lower property tax, but that is a matter for the local assessor, not the federal tax code." All easements must be recorded with the deed to your property, and it's a good idea to give a copy of the transaction to your assessor.
Your Right to Contest
Annual property taxes are based on your municipality's assessment of the value of your home. These are highly subjective numbers, and the amount of time that elapses between updates varies widely. As property values climbed over the past several years, some towns were diligent about increasing assessments to keep growing their tax base while others lagged behind. Significantly, as some markets have experienced declining values, it may be that many assessments are higher than they should be.
Any homeowner who believes his assessment is too high has the right to contest the tax bill every year, usually at what is often called—aptly—Grievance Day. In order to do this, you must file the correct forms and appear before the grievance committee or other tax authority. You are expected to provide proof in the form of current market appraisals for your property and comparable assessments from the area. This practice, also known as "tax certiorari," is an annual ritual for commercial real estate owners. Of course, every state has a slightly different process of appeal, and a useful summary can be found at quickval.com/tax/index.asp.
"Homeowners really should pay attention to the assessor's valuation of their property," says Ken Brown, an attorney with Bleakley Platt & Schmidt in the ultrahigh-tax Westchester County, New York. If your neighbors have succeeded in getting their assessments lowered, you may be paying more than your fair share. As attorney Small humorously puts it, "Towns can be equally unfair to everyone, but they can't discriminate against a particular owner." Reductions in future tax bills are not at all uncommon. For co-op or condominium owners, "your board of directors or managers should be on top of this," Brown says, "so it's not a bad idea to ask them."
You can lower your taxes by as much as 30 percent or more through certiorari, according to Brown. Though the process is time-consuming, here in America we have almost as many lawyers as we do taxes, so finding one to handle the entire procedure is simple. The local attorney who did your closing or mortgage paperwork will likely do this or can recommend someone who will. Generally the attorney can arrange for an appraisal of your property (at your expense), then file and process the complaint, and even show up to argue your case. Attorneys who do this regularly are known to your local authority or board, which can be helpful. Many operate on a contingency-fee basis. An experienced lawyer with a broader practice will usually ask for up to 50 percent of any first year's tax savings for a private home. If your tax bill is extremely large and your case solid, negotiating that fee is advisable.
Making the effort to lower my property taxes and carefully working through the process of donating easements has been rewarding both financially and psychically. Certiorari proceedings produced an assessment reduction that paid our oil bills for several years, while preservation easements on a suburban property and an Upper East Side Victorian brownstone helped protect historic neighborhoods and also generated meaningful deductions.
These programs exist to ensure all property owners are taxed fairly and to stem the tide of development and unwelcome architectural change, particularly in areas with high real estate values. In a world where the cliché "What goes up must come down" clearly does not apply to property taxes, a little grievance and an easement might go a long way.
Note: For all tax planning advice and strategies, make sure to work with a professional—and start now to be ready for April 2008.
Who to Call
Generally conservation and other types of easements are granted to a local land conservancy/trust or historical society. The resources below can assist in locating reputable organizations in your area.
Land Trust Alliance
1660 L St. NW, Ste. 1100 Washington, DC 20036 202-638-4725 lta.org(LTA does not handle easement work, but it does have a com- prehensive listing of all the land trusts in the country.)
American Land Conservancy
250 Montgomery St. Ste. 210 San Francisco, CA 94104 415-912-3660 alcnet.org
Ken Brown 914-287-6132 bpslaw.com
Stephen J. Small 617-357-4012 stevesmall.com