Landowners may be allowed a federal income tax deduction for the contribution of a conservation easement restricting donated property. A qualified conservation contribution is a donation of a qualified real property interest to a qualified organization which is exclusively used for conservation purposes. The conservation easement must also be protected and the restrictions on the use of the property must be granted in perpetuity. The contribution must be made to governmental units, churches, schools, hospitals, or Section 501(c)(3) public charities and supporting organizations.
The donation of the easement must also advance a qualified conservation purpose. The qualified contribution advances a conservation purpose if the donation (1) preserves land areas for outdoor recreation by, or the education of, the general public; (2) protects a natural habitat of fish, wildlife, or plants, or similar ecosystem; (3) preserves open space (including farmland and forest land) where such preservation is for the scenic enjoyment of the general public, or pursuant to a clearly delineated Federal, State, or local governmental conservation policy, and will yield a significant public benefit; or (4) preserves a historically important land area or a certified historic structure.
A landowner is generally entitled to a federal income tax deduction of 30 percent or 50 percent of the owner’s contribution base for the taxable year. If the value of the qualified conservation contribution exceeds the deduction limitations, landowners may carry the deduction forward for up to five (5) succeeding taxable years. The amount of the tax deduction will depend upon which type of charitable organization receives the donation of the conservation easement. By and large, a property owner may be entitled to a deduction limit of 50 percent for contributions to churches, educational organizations, hospital or medical research organizations, qualified public charities, governmental units, and private foundations. For contributions to all other organizations, the federal tax deduction is presently limited to 30 percent of the owner’s contribution base in easement property.
The fair market value of a conservation easement is an important feature to a landowner considering the donation to a qualified organization. Conservation easements are generally valued by viewing the value of the easement before and after the easement is placed on the property, and the value of the deduction is the difference between these two values. In order for an owner to claim a federal tax deduction for a conservation easement valued at more than $5,000, he or she must obtain a qualified appraisal of the donated property and attach the appraisal to the owner’s income tax return for the tax year in which the contribution is made. The qualified appraisal will show the fair market value of the affected property before and after the conservation restriction is imposed which will be used to calculate the federal tax deduction.
The Internal Revenue Code and the related Treasury Regulations impose a number of substantiation requirements on taxpayers claiming a deduction for a donated conservation easement.
The Treasury Regulations define a qualified appraisal as an appraisal document prepared by a qualified appraiser no earlier than 60 days before the contribution date and no later than the extended due date of the income tax return first claiming the deduction. A qualified appraisal must include the following information:
- A detailed description of the property.
- The property’s physical condition (for a contribution of tangible property).
- The date or expected date of the contribution.
- The terms of any agreement relating to the property’s use, sale or other disposition.
- The appraiser’s name, address, and taxpayer identification number, and that of the appraiser’s employer or partnership.
- The qualifications of the appraiser, including the appraiser’s background experience, education and membership in professional appraisal associations.
- A statement that the appraisal was prepared for income tax purposes.
- The date the property was appraised.
- The appraised fair market value of the property on the date or expected date of the contribution.
- The method of valuation used to determine the fair market value.
- The specific basis for the valuation (such as specific comparable sales transactions or statistical sampling, including a justification for using sampling and an explanation of the sampling procedure used).
A landowner who satisfies these requirements for a qualified appraisal will strictly comply with the Treasury Regulations and this will provide a basis for which his or her valuation of the conservation easement may be accepted by the Internal Revenue Service. Landowners are often times unable to strictly comply with the qualified appraisal rules established in the Treasury Regulations. In a 1993 decision, Bond v. Commissioner, the United States Tax Court held that the qualified appraisal requirement is directive, and donors need only substantially comply with these rules in order for the valuation of the contributed property to be accepted. While the Tax Court has also issued decisions since Bond limiting the applicability of the substantial compliance doctrine to defective valuation appraisals of conservation easements, the Tax Court has also concluded that where a qualified appraisal contains sufficient information to allow the Internal Revenue Service to evaluate the contribution and which unconditionally includes the valuation method and specific basis for the valuation, the appraisal report will be deemed to be in substantial compliance with the qualified appraisal requirements.
The Internal Revenue Service has increasingly scrutinized conservation easement deductions claimed by taxpayers, focusing often less on the actual value reported for the easement but on the exact and detailed substantiation requirements set forth in the Treasury Regulations. If the Internal Revenue Service is successful in challenging an easement based on one or more technical missteps by an owner in failing to properly document the donation and the related reporting of the donation to the Internal Revenue Service, the entire deduction may be disallowed without even getting to the issue of the property’s value. The donor may then be in the unenviable position of having donated away valuable property rights, but receiving no federal tax deduction, because of a failure to follow the strict substantiation requirements in the Treasury Regulations.
The appraisal report for a donated conservation easement requirement may arguably be the most important document examined by the Internal Revenue Service during a tax audit of a conservation easement. A landowner who has not obtained a qualified appraisal or has received a poorly completed appraisal of the contributed property increases the risk of having the federal tax deduction for the easement disallowed. Appraisals are opinions of fair market value which are traditionally based on facts and the appraiser’s professional judgment and experience. The landowner should obtain a well-documented and supported qualified appraisal of the contributed property in order to support the fair market value of the conservation easement donated and claimed as a deduction on the owner’s tax return.
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