Land Conservation
I.R.C. § 170(H)
What is a Conservation Easement?
A conservation easement is a restrictive covenant placed on a piece of property to conserve the property for some social or ecological benefit in perpetuity. It must be conveyed to or overseen by a qualified organization which generally is a land trust or government entity, and it also must fulfill some conservation purpose. Generally, the landowner continues to own the land, but the land trust or government entity monitors the property and has the power to permanently restrict the use of the land in accordance with the easement. The interest restricted is often some type of development potential on the land that the land owner agrees to terminate in perpetuity. As a result the land owner is able to claim a non-cash charitable contribution on his or her tax return for the extinguished value.
What are the economic benefits associated with a Conservation Easement?
In accordance with Section 170(h) of the Internal Revenue Code, conservation easements are a deductible qualified conservation contribution if the easement is a real property interest, has a valid conservation purpose, and is donated to a qualified organization. This means that landowners may take a deduction for the value of the donated easement to offset up to 50% of their adjusted gross income.
What are valid conservation purposes as defined by the IRS?
According to Section 170(h) of the Internal Revenue Code, “conservation purposes” as defined by the IRS include:
- Preservation of land areas for outdoor recreation by, or the education of, the general public.
- Protection of a relatively natural habitat of fish, wildlife, or plants.
- Preservation of open space for the scenic enjoyment of the general public, or preservation of open space pursuant to a clearly defined governmental conservation policy, provided such preservation will yield a significant public benefit.
- Preservation of a historically important land area or certified historical structure.
How are Conservation Easements valued?
Conservation easements are generally valued by subtracting the fair market value of the encumbered property from the fair market value of the property before the easement. The fair market value must take into account the “highest and best” use of the property.
What are the tax reporting requirements associated with a Conservation Easement?
- Form 8283- Reports the value of non-cash charitable deductions.
- Form 8886- Reports the participation in a listed transaction.
- Qualified Appraisal Report- Corroborates the reported value of the conservation easement.
- Written acknowledgment from the qualified charitable organization.
- Copy of the property’s deed stamped with the recording date.
The takeaway:
We urge caution before entering into these kinds of arrangements. The IRS has stepping up enforcement against listed syndicated conservation easement transactions, so reasonable valuations of any donated land must be taken otherwise the taxpayers may risk a deduction being denied.
