United States: Conservation Easements – Extension Of Tax Incentives

Last Updated: April 10 2013
Article by Rick Ackel and Sid Luckenbach

The American Taxpayer Relief Act of 2012 (The Act) renews the enhanced charitable income tax deduction for qualified conservation easements through 2013. 

The law contains expanded tax incentives that increase financial benefits for landowners who wish to preserve their farms, forests, or natural areas by donating a voluntary conservation easement, or agreement, on their land.

Prior to The Act, the rules for 2012 and subsequent years generally allowed an individual donor to take a charitable deduction for the donation of qualified real property of up to 30% of adjusted gross income (AGI). Any amounts not utilized in the year of contribution as a result of the charitable contribution limitation were allowed to be carried forward for up to five years. The renewed law raises the charitable deduction a landowner can take for donating a qualified conservation easement for 2012 and 2013 from 30% of AGI to 50%. Qualifying farmers and ranchers can take a charitable deduction of up to 100% of their AGI for 2012 and 2013. The law also increases the number of years over which a landowner can carryover amounts that were not deductible in the year of contribution due to the charitable deduction limitation from 5 to 15 years.

What is a qualified conservation easement? A conservation easement is an interest in real property restricting the future use of the land for preservation, conservation, wildlife habitat, or some combination of those uses. A conservation easement may permit farming, timber, harvesting or other uses of a rural nature to continue, subject to the easement. The restrictions on use of the land must generally be perpetual.

The creation of a conservation easement typically requires the participation of an entity like a qualified land trust. According to U.S. Treasury Regulations, if a conservation easement is donated, the easement holder that accepts the easement must have a commitment to protect the conservation purpose of the conservation easement, the resources to enforce the restrictions for the duration of the conservation easement, and be a qualified organization such as a government unit or a 501(c)(3) organization. As highlighted earlier, the easement, or agreement, between a land owner and a conservancy organization suppresses development upon the real property for an indefinite term. In exchange for the lost development rights, the land owner receives a benefit in the form of a tax deduction for a charitable contribution of the easement value.

To obtain a deduction requires the donor to submit a Qualified Appraisal prepared by a Qualified Appraiser as part of his/her tax filing; both terms are defined in the U.S. Treasury Regulations. A Qualified Appraiser is, among other things, an individual that holds himself out as one appraising the type of property being valued. A Qualified Appraisal is prepared in line with U.S. Treasury Regulations in terms of format, timing and information contained.

To quantify the value of a conservation easement, most appraisers employ a “before and after” valuation methodology. This is essentially two appraisals: 1) the appraisal of the property (and other contiguous family-owned parcels) assuming the easement is in place; and 2) the appraisal of the property assuming the property is not encumbered by the easement. The difference between the two values is the value of the conservation easement.

It is critical that the appraisal report meet U.S. Treasury Regulation guidelines. In the past, IRS has challenged a number of positions and disallowed the deduction in many cases. Criticisms have included:

  • The appraisal report does not properly address the highest and best use. For example, the analysis may assume a land use change (such as a significant re-development) without proper analysis and support;
  • The appraisal does not meet the requirements of a Qualified Appraisal and/or the appraiser is not a Qualified Appraiser;
  • The appraisal did not consider the contiguous, family-owned parcel. Treasury guidelines dictate that the appraisal report consider the value impact on all contiguous family owned property – not just the parcel on which the easement is being placed. This would include enhancement value to other parcels owned by the donor or donor’s family; and
  • The easement does not serve a qualified conservation purpose.

The process of land conservation may take many months or longer to complete. As of now, these enhanced tax incentives are only secured until December 31, 2013. Although only three months into the New Year, now is the time to begin planning for land preservation in 2013. A qualified advisor will need a fair amount of time to ensure that a conservation easement can be finalized by year-end so that landowners can take advantage of the renewed tax incentives.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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