The benefits of preserving property through a conservation easement extend beyond those that protect the environment. A conservation easement is a voluntary, legal agreement that restricts or limits the use of land in perpetuity in order to protect its conservation values. To incentivize landowners to preserve their property, the IRS offers significant tax deductions in exchange for landowners relinquishing their rights to develop their property.

Many properties lay vacant, abandoned, or limited by zoning or development restrictions and can sometimes be viewed as a burden or hindrance to the owner and surrounding community. A conservation easement is a sustainable alternative use for the properties like this. The conservation easement may affect only a portion of the land or the entire area and may be minimally or exceedingly restrictive.

In general, conservation easements are surprisingly underused, and many landowners are unaware of the tax deductions available. This newsletter hopes to shed light on the process of preserving property through a conservation easement and how landowners and the environment can benefit from such action.

Overview of Conservation Purposes

Under IRS requirements a conservation easement must be made exclusively for one of the following conservation purposes:

  1. Preservation of land areas for outdoor recreation by, or the education of, the general public.
    • Substantial and regular physical access by the general public to the preserved land is required.
  2. Protection of a significant relatively natural habitat for fish, wildlife, or plants or a similar ecosystem.
    • Significant habitats and ecosystems include: habitats for rare, endangered or threatened species; natural areas that are relatively intact and are considered high quality examples of land; and natural areas that are in or contribute to the ecological viability of a park or similar conservation area.
    • Restrictions on public access are allowable.
  3. Preservation of open space for the scenic enjoyment of the general public, or pursuant to a Federal, State, or local governmental conservation policy.
    • Must preserve open space and must yield a significant public benefit.
    • Does not require physical access; visual access to or across the property by the general public is sufficient.
  4. Preservation of historically important land area or certified historic buildings.

Choosing a Qualified Organization as Donee

The conservation easement must be transferred to an eligible donee in order to qualify for a contribution deduction. An eligible donee: (a) is a qualified organization; (b) must have the commitment to protect the conservation purpose of the donation; and (c) must have the resources to enforce the conservation restrictions. A qualified organization is one of the following:

  • A governmental unit, including the Federal government, a United States possession, the District of Columbia, a state government, or any political subdivision of a state or United States possession.
  • A public charity having 501(c)(3) status that meets the public support test of IRC §170(b)(1)(A)(vi) or section 509(a)(2).
  • An IRC § 501(c)(3) organization that meets the requirements of IRC § 509(a)(3) and that is operated, supervised, or controlled by one of the organizations described above.

The organization you choose must be committed to protect the conservation purposes of the donation and must have the resources to enforce the restrictions of the conservation easement. Resources do not necessarily mean cash. Resources may be in the form of the volunteer services of lawyers who provide legal services or conservationists who inspect the property and prepare monitoring reports. The donee organization must also be cooperative and willing to execute documents required to be submitted to the IRS. These documents include the following:

  • Contemporaneous written acknowledgment. This acknowledgment must:
    • Describe the property received by the donee;
    • Contain a statement of whether the donee provided any goods or services in consideration in whole or in part, for the gift; and
    • Provide a description of and a good faith estimate of the goods or services, other than intangible religious benefits, provided to the taxpayer.
  • Noncash Charitable Contributions Form 8283 (donee signature required)
  • Baseline Study (donee signature required) (described below)
  • Conservation Easement (donee signature required)

Baseline Study Requirements

The donor of a conservation easement must provide baseline documentation (sometimes referred to as the baseline study) to the donee, prior to the time the donation is made. The study should provide specific information about the conservation values of the property and is generally prepared by a person with specific training in the assessment of conservation values. Documentation may include:

  • Survey maps from the United States Geological Survey, showing the property and easement boundaries and other contiguous or nearby protected areas.
  • A map of the area showing all existing man-made improvements and vegetation, and identifying flora and fauna, land use history and distinct natural features.
  • An aerial photograph of the property.
  • On-site photographs taken at appropriate locations on the property.

The documentation must be accompanied by a statement signed by the donor and a representative of the donee organization affirming the documentation of the natural resources is an accurate representation of the protected property at the time of the transfer.

Appraisal Considerations

Any parcel of land can be preserved by way of a conservation easement so long as it meets at least one of the conservation purposes discussed above. However, there are large areas of land in New York which private owners’ right to develop their property is limited by way of legal protections. Privately owned parcels located within the jurisdiction of government organizations like the Adirondack Park Agency or the Long Island Central Pine Barrens Commission may already be burdened with land use restrictions. These restrictions often influence the value of the property and are why the appraisal plays a significant part role in the conservation easement and tax deduction process.

If you are considering a conservation easement appraisal for tax purposes, many factors will help get the appraisal accepted by the IRS. In addition to the typical information found in such documents, such as the location and condition of the property, these points also come into play:

  • The value given to a property considers comparable sales within the geographic area of the subject property.
  • If highest and best use analysis is present, the appraisal must also have a market analysis.
  • It must comply with Internal Revenue Code requirements.
  • Complete information, including failed attempts to sell the property, should also be part of the appraisal.
  • Appraisal report is published within 60 days of property preservation.

Some Tax Deduction Details

Under the IRS regulations, charitable contributions of real property are deductible in the year the conservation easement is recorded. Any charitable contribution amount that cannot be utilized by the taxpayer in the year of donation can be carried over and claimed on subsequent year tax returns, in the case of a conservation easement, for up to 15 years. There is a 50% limit of income for the deductions.

In 2017, the IRS issued a Notice regarding Syndicated Conservation Easement Transactions. This notice informed the public that the IRS is on alert for transactions that utilize pass-through entities to give investors the opportunity to claim charitable contribution deductions in amounts that significantly exceed the amount invested. Thus, any other pass through entities operating under the donor entity should be clearly defined.

Quid Pro Quo and Charitable Intent

The deduction for preserving the property should not be available if it based on a quid pro quo. A quid pro quo contribution is a transfer of money or property in exchange for goods or services. An example is a land developer agreeing to grant a conservation easement to a government body in exchange for the approval of a proposed subdivision. If the preservation resulted from a government body request in exchange for an authorization, the deduction should not be allowed.

Tax Deduction Considerations

Factors that may affect the amount a taxpayer may claim as a charitable contribution deduction for a conservation easement include:

  • Fair Market Value (FMV) of Easement Area
    • The value of the donated easement must meet the definition of FMV as defined by 26 CFR § 1.170A-1(c)(2): The FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.
  • Quid pro quo and charitable intent
    • As discussed above.
  • Type of property (ordinary income, short-term capital gain, long-term capital gain)
    • Generally, if the property is ordinary income property or short-term capital gain property (held for less than one year), the taxpayer’s deduction is limited to basis. IRC § 170(e)(1)(A).
    • If the taxpayer contributes appreciated long-term capital gain property (held for over one year), the deduction generally is not limited to basis and may equal FMV. IRC § 170(e)(1).
  • Basis
    • In general, the basis of property is the cost. 26 CFR § 1.1012-1.
  • Percentage limitations
    • IRC § 170(b)(1)(H): For charitable contributions by individuals, the amount of the deduction a taxpayer may claim is subject to a limitation based on a percentage of that taxpayer’s “contribution base.” Contribution base for individuals is defined in as the individual’s adjusted gross income (AGI) (computed without regard to any net operating loss carryback to the taxable year under IRC § 172).
    • Generally, when an individual contributes a qualified conservation contribution, the individual’s deduction for that contribution may not exceed 50% of his or her “contribution base.” IRC § 170(b)(1)(E)(i).
    • IRS Publication 526 provides: deduction for qualified conservation contributions (QCCs) is limited to 50% of your AGI minus the deduction for all other charitable contributions.
    • Taxpayer can carry over unused charitable contributions for conservation easement contributions. The carryover period is 15 years. IRC § 170(b)(2)(E) and (2)(B)(ii).
  • Type of donee organization
    • As discussed above.

Amending a Conservation Easement

A conservation easement restricting the use of real property must be enforceable in perpetuity, meaning that it lasts forever and binds all future owners. An easement will fail the perpetuity requirements if it allows any amendment or modification that could adversely affect the perpetual duration of the deed restriction.

Mortgage Implications

If the property has a mortgage or lien in effect at the time the easement is recorded, the easement contribution is not deductible unless the mortgagee or lien holder subordinates its rights in the property to the rights of the donee organization to enforce the conservation purposes of the easement. in perpetuity.

The taxpayer must obtain a subordination agreement from the lender prior to the donation of the conservation easement. The subordination agreement is generally part of the lender agreement attached to the conservation easement deed and must be recorded contemporaneously with the conservation easement.

Rigano LLC is a New York based environmental law firm with extensive experience in the complex legal requirements of conservation easements.  We would be delighted to discuss potential conservation opportunities and tax deduction scenarios with you.

Please do not regard this newsletter as legal advice.