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Donations of Conservation Easements

A new Internal Revenue Service Audit Techniques Guide (ATG) on conservation easements gives taxpayers an outline for how IRS examiners will view charitable contributions of conservation easements. The purpose of a conservation easement is to preserve and protect property from future development or subdivision.

Acknowledging the need to preserve our natural resources, Congress allows a charitable deduction for property owners who give up certain rights of ownership to preserve their land or buildings for future generations. However, having seen abuses of this tax provision in the past, Congress is issuing guidance for the deductibility of this type of donation.

To qualify for this income tax deduction, the easement must be legally binding and must permanently restrict use and development of the property. It must be made to a qualified organization and serve a conservation purpose, meaning the property must have an appreciable natural, scenic, historic, scientific, recreational, or open-space value. 

Qualified Real Property

Examples of real property qualifying for the deduction are parks, wetlands, farmland, forest land, scenic areas, and historic land or structures. 

Qualified Organization

Qualified organizations include a federal or state governmental unit or a public charity described in section 501(c)(3) of the Internal Revenue Code. A conservation easement must be received by an eligible donee to be deductible. (Not all qualified organizations are eligible to accept deductible conservation easements.) Furthermore, a qualified organization must have a commitment to protect the conservation purpose of the easement. Such organizations will generally have a monitoring system in place to enforce the restrictions of the easement.

Conservation Purpose

IRC § 170(h)(4)(A) defines “conservation purpose” as one of the following:

• Preservation of land for the outdoor recreation of, or education of, the general public
• Protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem
• Preservation of open space either for the scenic enjoyment of the general public or pursuant to a clearly delineated governmental conservation policy (both purposes must yield a significant public benefit)
• Preservation of a historically important land area or a certified historic structure

The ATG further explains each of the four qualifying purposes in detail. 

Perpetuity of Restrictions

A deductible conservation easement must be made in perpetuity, permanently restricting the use of the property. This means that the deed of conservation easement must state the following:

• The restriction remains on the property forever 
• The restriction is binding on current and future owners of the property

If a conservation-easement deed only imposes restrictions for a specific period such as 10 years, it is not deductible since it does not meet this requirement. In addition, an easement is not considered to be in perpetuity if it allows for future amendments that would change the nature of the restrictions. 

Substantiation

The burden of proof is on the taxpayer to demonstrate that the transfer of property to a qualified organization is deductible. For all donations of $250 or more, written acknowledgment must be received from the charity. Specifically, the taxpayer must keep records of pertinent expenses, and the charity must write a letter acknowledging the gift. The letter must include the description (but not the value) of the easement and a statement that nothing was received in return. If anything was received in return, a good-faith estimate of the value of the goods received must be subtracted from the charitable deduction. Finally, Form 8283 must be properly completed and attached to the taxpayer’s Form 1040 for all donations greater than $5,000.

Qualified Appraisal

Qualified appraisals are required for all deductions of conservation easements greater than $5,000. The rules for an appraisal to be considered “qualified” are fairly intuitive and are specifically set out in the ATG. 

The value of the easement is generally the fair market value at the time of the contribution. If there is a substantial record of sales of easements comparable to the donated easement, the fair market value (FMV) is based on the sales price of such comparables. If there is no substantial record of marketplace sales, the value is generally determined using the “before and after” method which takes into account the decrease in the FMV of the underlying property after the easement is transferred and compares it to the value of the property before it was transferred. The difference is the value of the contribution. If there is no decrease in the property value after the easement has been given, there is no charitable donation allowed. If the taxpayer owns contiguous property, that property is included in the “before and after” FMV amounts as well. 

For further information, please contact Patti Benaissa at pbenaissa@BlackmanKallick.com or 312-980-3290, Nora Stapleton at nstapleton@BlackmanKallick.com or 312-980-2933, or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.