Congress has been known to use tax "breaks" to encourage favored activities. America's vanishing wilderness and forests have long been of concern and, not surprisingly, tax breaks are given to landowners of some forestlands who dedicate land for conservation purposes through the creation of a "qualified conservation easement."
Qualified Conservation Easement
There is both an immediate income tax advantage and a subsequent estate tax benefit for qualifying donors. Under applicable U.S. tax law, to be eligible for "conservation easement" treatment there must be a contribution of a "qualified interest in real property" to a "qualified organization" exclusively for "conservation purposes." Such an easement may be created by a landowner entering into a legally binding agreement with the organization that restricts the development and future use of a piece of real property to achieve conservation objectives.
Qualified Interest in Real Property
A qualified interest in real property means:
- The entire interest of the donor other than a qualified mineral interest;
- A remainder interest; or
- A restriction, granted in perpetuity, on the allowable use of real property.
The easement must be contributed to a qualified organization, including:
- The U.S. or one of its possessions, or a state or a political subdivision of a state, as long as the contribution of the easement is exclusively for public purposes;
- A domestic entity that meets the requirements for a charity under section 170(C)(2) of the Internal Revenue Code (IRC) and that generally receives substantial support from a government unit or the general public; or
- Any entity that qualifies under IRC section 170(h)(3)(B), which contains requirements about income received by the organization.
Allowable Conservation Purposes
The easement must be intended for at least one of the following conservation purposes:
- Preservation of land for outdoor recreation by, or the education of, the public;
- Protection of a natural habitat for fish, wildlife, or plants, or a similar ecosystem.
- Preservation of open space that will yield a significant public benefit for the scenic enjoyment of the public or pursuant to a clearly delineated federal, state, or local government conservation policy; or
- Preservation of an historically important land area or a certified historic structure.
Income Tax Effects of Contributed Conservation Easements
Once the landowner and the land have qualified for conservation easement treatment, the value of the easement contributed may be deducted from taxable income. Usually a certified appraisal of the property's value both with and without the easement is obtained, and the difference is the value of the easement. The deduction is limited to 30% of adjustable gross income in any one year, but can be deducted for up to six years or until the easement value has been exhausted.
Federal Estate Tax Treatment of Conservation Easements
When the landowner dies, the land remains subject to the conservation easement. The existence of the easement may enable the landowner's estate to exclude for estate tax purposes a portion of the fair market value of the land subject to the easement. Federal estate tax laws also have their own requirements for a conservation easement:
- The easement must be a qualified real property interest granted by the decedent or a member of the family under IRC section 170.
- The land must be located in the U.S. or one of its possessions.
- The land must be owned by the decedent or a member of the family during the three-year period ending on the date of the decedent's death.
- The easement must prohibit all but minimal commercial recreational land use.
Under federal estate tax laws, property that is part of an estate must be valued and the total value of the estate assets, less allowable deductions, determines the amount of any estate taxes owed, if any. The value of the land subject to the conservation easement has already been reduced as a result of the contribution of the easement. Qualification of the conservation easement allows the estate to exclude a further portion of the remaining value of the land from the gross estate.
The administrator or other person in charge of the estate must make an appropriate and timely election with the IRS, which, when made, is irrevocable. The estate is then allowed to exclude an applicable percentage of the value of the land that is subject to the conservation easement. There is, however, a maximum limit for this exclusion of $500,000. The exclusion amount can be up to 40% of the value of the land, subject to a reduction of two percentage points for each percentage point by which the value of the easement is less than 30% of the value of the land without the easement.
However, according to recent announcements, the IRS intends to review transactions involving improper charitable contribution deductions of conservation easements, and may challenge the tax-exempt status of participating organizations. The IRS is concerned that conservation easements have been a vehicle for potential abuse in certain situations because the donor (or related parties) can reasonably expect to receive economic benefits greater than those received by the general public as a result of the donation. In view of the increased IRS scrutiny, careful consideration should be given before engaging in such a transaction.
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