The National Conservation Easement Database estimates that at least 40 million acres of land in the United States are protected with perpetual conservation easements.1
Conservation easements serve a very important public purpose and can be a powerful planning tool for the right client. Charitably inclined donors can benefit the public by protecting natural and historic resources through the donation of a conservation easement. If the donation meets certain requirements, it can qualify as a tax-deductible charitable donation.
An enhanced conservation easement tax incentive was originally introduced as part of the Pension Protection Act of 2006. The incentive allowed donors to receive greater credit for donations of valuable conservation easements.
The 2006 incentive expired in 2011, and for the years following, Congress enacted short-term extensions until 2014. After the incentive was first passed in 2006, reports by the Land Trust Alliance, a national conservation organization, estimated that land conservation increased by 35 percent, at 1 million acres per year.2 The incentive finally expired on Dec. 31, 2014, and it was unclear if it would be reinstated.
On Dec. 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015. The new law reinstated the conservation easement tax incentive retroactively to Jan. 1, 2015 and made the incentive permanent (meaning there’s no set expiration date, and the law will remain in effect indefinitely). The now permanent law provides for the following benefits to donors of conservation easements:
- Raises the deduction an individual donor can take for donating a conservation easement from 30 percent of his adjusted gross income (AGI) in any year to 50 percent;
- Allows qualifying farmers and ranchers to deduct up to 100 percent of their AGI; and
- Extends the carry-forward period for a donor to take tax any excess deductions for the donation of a conservation easement from five to 15 years.
A qualified farmer or rancher is defined as a taxpayer whose gross income from the trade or business of farming (within the meaning of section 2032A(e)(5) of the Internal Revenue Code) is greater than 50 percent of the taxpayer’s gross income for the taxable year.
The incentive applies not only to conservation easements, but also to all donations covered in IRC Section 170(h)(2).
Without the incentive, a property owner earning $100,000 AGI per year who donates a conservation easement valued at $1 million, could take a deduction of $30,000 for the year of the donation and for another five years, for a total of $180,000 in deductions. With the permanent incentive applied, the same property owner can take a deduction of $50,000 for the year of the donation and for the next 15 years, for a total of $800,000 in deductions. Meanwhile, qualifying farmers and ranchers have the potential ability to zero out tax liability for 15 years by deducting 100 percent of their AGI.
Strict Requirements for Deductions
The incentive encourages farmers, ranchers, wealthy donors and more modest-income property owners to make donations of conservation easements. However, donors and their advisors should keep in mind that the Internal Revenue Service pays close attention to high value donations, including donations of conservation easements.
To be deductible, a conservation easement must meet the conservation purposes test as set forth in the existing law. Conservation easements must be legally binding agreements that restrict the use, modification and development of property. The restrictions must be permanent and binding on the current and future owners of the easement.
The donation must be to a qualified organization3 (generally a reputable land trust or governmental unit), and the conservation purposes of the contribution must fall into one of the following categories:
- The preservation of land areas for outdoor recreation by, or education of, the general public;
- The protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem;
- The preservation of open space (including farmland and forest land); or
- The preservation of a historically important land area or a certified historic structure.4
To claim a deduction for the donation of a qualified conservation easement or other noncash charitable contribution of property worth more than $5,000, the IRC and Treasury Regulations require that a qualified appraisal of the property be attached to the tax return for the year in which the deduction is claimed; the appraisal must be completed by a qualified appraiser not earlier than 60 days before the contribution date nor later than the extended due date of the federal income tax return on which the deduction is claimed.5
The Treasury Regulations and the IRS set forth a detailed list of the items required in a “qualified appraisal,”6 as well as the definition of a “qualified appraiser.”7
If there’s an improper or inflated valuation of a conservation easement, the taxpayer, return preparer and appraiser may be subject to penalties.
Take Advantage of the Incentive but Be Careful
Throughout 2015, individuals interested in donating conservation easements with respect to their historic or natural property were unsure whether the enhanced incentive would be reinstated. This uncertainty made it difficult to undertake proper planning and undoubtedly discouraged some individuals from making such a donation. Now that the incentive has been made permanent, more donors will likely establish conservation easements, thereby reducing their taxable income and reducing the size of their estates. However, taxpayers and their advisors must remember all of the requirements to substantiate a deduction for the donation of a conservation easement because the IRS is watching.
1. National Conservation Easement Database (NCED), http://nced.conservationregistry.org/.
2. Land Trust Alliance, America’s Farmers, Ranchers, Foresters, and Sportsmen One Step Closer to Protection of Critical Conservation Tool, at www.landtrustalliance.org/america%E2%80%99s-farmers-ranchers-foresters-and-sportsmen-one-step-closer-protection-critical-conservation.
3. Internal Revenue Code Section 170(h)(1).
4. IRC Section 170(h)(4).
5. IRC Section 170(f)(11); Treasury Regulations Section 1.170A-13(c)(2).
6. Treas. Regs. Section 1.170A-13(c)(3)(ii)(A)-(K).
7. IRC Section 170(f)(11)(E)(ii)-(iii).