About Conservation Easements

What is a conservation easement?

A conservation easement is one of the most powerful and effective tools available for the conservation of private land. It is a voluntary, legally binding agreement that limits the future use, modification or development of land forever. The property under easement remains privately owned, and activities such as farming, ranching, and timber harvesting may continue under the terms of the conversation easement, so long as such activities are consistent with the easement’s conservation value. A conservation easement can be donated to a nonprofit land trust that monitors the property and ensures the easement’s restrictions are followed.

What are the public benefits of conservation easements?

Conservation easements allow people to protect privately owned land by permanently restricting future development. Most land trusts only accept conservation easements when the donation has significant conservation values – such as relevance to clean water, wildlife habitat, agricultural preservation, scenic views, outdoor recreation, historic preservation or some other public benefit. An easement donation preserves those benefits in perpetuity.

When was the first conservation easement used?

While the first conservation easement dates to 1891, the mechanism was not commonly used as a tool to encourage conservation until after 1976, when Congress reworked the tax code to allow landowners to report easements as charitable deductions to their federal income tax. Since that time, conservation easements have preserved millions of acres of agricultural lands and wildlife habitat, protected water quality, and preserved America’s open spaces.

Why would people choose to donate a conservation easement, and how do landowners benefit?

Landowners donate easements for a variety of reasons, including: protecting land for future generations, reducing tax burdens in exchange for giving up property rights, and avoiding the threat of government land acquisition or land use regulations. Easements can be tailor-made to maximize conservation targets. Landowners who donate their conservation easements to a qualifying nonprofit organization – typically a land trust – also receive a tax deduction for the value of the donated easement.

How does the tax code incentivize conservation easement donations?

In December of 2015, Congress enhanced and made permanent the conservation easement tax deduction through Section 170(h) of the Internal Revenue Code to encourage more of these charitable contributions. Under the new law, landowners can take a deduction for the value of the donated conservation easement up to 50% of their adjusted gross income. Landowners may also carry forward the value of their deductions for up to 15 years. Farmers and ranchers who receive more than 50% of their gross income from agriculture can make a conservation easement donation and claim a deduction that offsets up to 100% of their adjusted gross income.

About Conservation Easement Donations from Landowners in the Form of a Partnership

I’m hearing more about different partnerships making conservation easement donations. How do these donations occur?

Because land is a valuable, appreciating asset, landowners are sometimes conflicted by their desire to preserve beloved property for the future and their need to tap the land’s financial worth today. For some wealthy landowners and families with large income-tax burdens, the Section 170(h) tax deduction may provide enough incentive to give up a property’s development rights forever and conserve it in perpetuity.

Other landowners with lower incomes and relatively low income-tax obligations may not be in a financial position to make the decision to conserve their land. In those cases, the landowners may feel their only option to raise needed cash is selling their land to a developer. However, there is another viable alternative for landowners who desire a stake in the outcome of their land, which is often the case for property that has been family-owned for generations. This other alternative is working with other sources of private capital where, consistent with established partnership tax law, private equity investors come together with the landowner in the form of a partnership and then, as a viable alternative to development of the property, consider making a conservation easement donation.

Whether its several family members, an investment between friends, or a group of un-related individuals who own property, these landowners play an important role in bringing greater private funding to conservation than otherwise would be available. Like an individual landowner or farmer, these landowners can choose to sell their property for development, develop the property themselves, or instead, make the choice to allow their land to be permanently conserved. Should these landowners elect to conserve their land by making a conservation easement donation, they receive a Section 170(h) tax deduction that Congress created to incentivize conserving the land forever. Making a conservation easement donation also requires:

  • Finding a qualified land trust who will travel to and study the property, and complete a baseline study documenting the conservation easement values and biodiversity;
  • Having a specialist attorney draft the deed of conservation easement and other legal instruments to ensure the property is donated properly and is protected from development in perpetuity; and
  • Having a qualified appraiser, and sometimes two, conduct an appraisal of the property to determine the appropriate value of the property’s development rights and the ultimate amount of the charitable donation. In addition, a third-party business expert should conduct a market feasibility study to independently verify the market and business assumptions used to value the property, including the highest and best use for which the property is being appraised.

Why is finding other private sources of funding like private equity funds or real estate investment partnerships important to land trusts’ conservation mission?

According to recent surveys of regional and local land trusts, finding financial support and money is the greatest barrier land trusts face in fulfilling their mission of conserving land. In an era where government funds and resources are dwindling, significant new sources of private funding are required to preserve scenic open space, protect wildlife habitat, conserve watersheds and safeguard cultural resources for future generations. While there are very few individual landowners who can afford to give up their land to conservation and use the tax incentives provided by Section 170(h), there are a significant number of real estate partnerships where individuals come together to own environmentally important tracts of land or seek to purchase such land for investment. These landowners, who have the legal form of a partnership, create a broader source of private funding for land trusts and can help greatly expand the pool of potential conservation easement donors.

How do the public and others benefit when partnerships make conservation easement donations?

Conservation easement donations elected by real estate partnerships and done in full compliance with the rules and regulations of Section 170(h) represent a win-win-win scenario because they: (A) allow environmentally valuable land to be conserved, (B) provide needed sources of funding to land trusts outside of just wealthy individual landowners, and (C) cost the federal government no more than if the donation came from an independently wealthy individual. In an era of scarce resources for conservation, individuals coming together in the form of partnerships represent an attractive source of private funding to protect sensitive land.

Why are the IRS and an organization representing land trusts concerned about some partnership donations?

They are concerned about entities claiming a tax deduction for a conservation easement based on an overvalued appraisal of the donation. Fortunately, when you consider any publicly available statistics, abuses of valuation with conservation easement donations are rare and are no more likely to come from a wealthy landowner, a family partnership or a partnership of unrelated individuals.

The Internal Revenue Service (IRS) plays an important role in enforcing tax law and has successfully litigated some cases involving overvalued conservation easement donations. However, a review of United States Tax Court cases shows that the court has frequently agreed with the taxpayer’s assertion of value over the lesser value asserted by the IRS. In fact, in three recent tax court cases that addressed valuation of conservation easements (Cave Buttes LLC v. Commissioner, Palmer Ranch Holdings, LTD v. Commissioner, and McGrady v. Commissioner) the values determined by the court matched or exceeded the taxpayers’ valuation and significantly exceeded the IRS asserted values.

Those infrequent cases of valuation abuse aside, it is important to remember that lawmakers on a bi-partisan basis strongly support private land conservation through the Section 170(h) tax deduction. In December of 2015, Congress enhanced and made permanent the conservation easement tax deduction to encourage more of these charitable contributions.

What does P4C think are the warning signs of an overvalued conservation easement donation?

The warning signs are in the appraisal. To ensure proper valuation, appraisals should be up-to-date and accurately substantiate the highest and best use of the property. Appraisals of conservation easements must be performed by a qualified appraiser who is authorized to appraise properties in the area, and the appraiser must attest to the fact that she or he has no conflict of interest. It is also a best practice to ensure that conservation easement appraisals are reviewed by at least one qualified third party for validation. Taxpayers and appraisers who overvalue conservation easements face significant tax penalties, and unscrupulous appraisers risk losing their livelihoods through revocation of their licenses.

Another indicator of a potentially abusive transaction is one that does not involve experienced tax lawyers who understand the appraisal requirements for tax deductions involving conservation easement donations. The placement of a conservation easement on land that will continue to be used in a manner inconsistent with any conservation purpose is also inappropriate.

How is it possible that land associated with a conservation easement donation can sometimes legitimately appraise for many times its purchase price just a couple years earlier?

For purposes of federal income tax law, all property that does not have an easily assigned market value (in contrast to assets like cash or publicly traded stock) is valued at its highest and best use, meaning it must be valued as if it was developed to achieve its greatest economic return. A property’s value based on highest and best use can be substantially higher than its purchase price because of the real estate expertise of the purchasers and significant pre-development work conducted prior to an appraisal. For example, a small parcel of land used for agriculture combined with other parcels of land that have various commercial uses, after being rezoned, can immediately become a far more valuable property for commercial development. Similarly, a land-locked property with no road access that is combined with property that has road frontage may aggregate into a far more valuable property for commercial development. Rezoning or the discovery of previously unknown minerals can also significantly increase the value of the land. For example, pastureland used for grazing would not be valued as pastureland, if rich oil reserves were subsequently discovered underground.

One real-world example is a recent U.S. Tax Court case (Cave Buttes LLC v. Commissioner) involving a parcel of land purchased for $100,000. The court held that the property was worth $2.1 million, or 21 times the purchase price. This increase occurred in just 38 months; the time between the purchase to the donation. In this case, the landowner bought the property at a substantial discount because the seller incorrectly believed that the property did not have legal access, an assumption that was disproven by the subsequent landowner after expending the money required for additional legal and survey work that the previous owner chose not to undertake.

In designating certain conservation easement donations as “listed transactions,” isn’t the IRS just asking for a greater level of transparency from land donors who happen to be partnerships?

We believe transparency is a good thing for conservation easement donations and all stakeholders. However, a land donor, whether in the form or an individual or a partnership, who claims a tax deduction for a conservation easement donation is already required to make substantial disclosures. The required IRS Form 8283, Noncash Charitable Contributions, already calls for:

  1. a description of the conservation easement;
  2. the appraised fair market value;
  3. the date of acquisition;
  4. manner of acquisition;
  5. the basis in the land;
  6. the amount claimed as a deduction; and
  7. the date of the donation.

Additionally, any landowner taking a deduction for a donation with a claimed value greater than $500,000 must attach the qualified appraisal to the return. Failure to include the required information means that the deduction claimed by a taxpayer will be entirely disallowed.

If the IRS needs additional information to ensure increased transparency, P4C supports updating IRS Form 8283 to capture such information.

Why is P4C concerned about the IRS designating certain conservation easement donations as “listed transactions?”

The IRS issued Notice 2017-10 on December 23, 2016, designating certain donations of conservation easements by partnerships as a “listed transaction.” While this guidance does not invalidate any compliant conservation easement donation, it does unfairly designate already highly disclosed charitable contributions as “tax avoidance transactions.” P4C has five primary concerns:

  1. The Notice is overly broad, is retroactively applied all the way back to the tax year of 2010 and does not address the issue of valuation;
  2. The Notice is not sufficiently supported by evidence. By any publicly available statistics, abuses of valuation with conservation donation are rare and there is no indication that overvalued deductions are more likely to be claimed by a partnership of unrelated individuals as compared to an individual landowner or a partnership comprised of family members;
  3. It targets an important legal form and category of conservation easement donors (i.e., partnerships) while ignoring the principal concern relevant to all such donations – namely, ensuring fair and accurate appraisals;
  4. It was issued in final form without a process by which interested members of the public could participate and provide input; and
  5. Coming near the one-year anniversary of bipartisan legislation that enhanced and made permanent the conservation easement tax deduction, the Notice clearly countermands Congressional intent to encourage more of these donations.

The need for land conservation far outstrips the financial resources currently available through government alone. Private equity and investment in the form of partnerships are an essential source of funding to finance needed conservation projects, especially when the current landowner does not have significant income and might otherwise be forced to sell to a developer. Because Notice 2017-10 is detrimental to private land conservation, P4C encourages the Trump Administration and 115th Congress to suspend and review this counterproductive, arbitrary guidance from the IRS. We encourage the IRS to work collaboratively with conservation stakeholders and Congress to improve standards and education around the valuation of conservation easement donations.

About P4C

What is the Partnership for Conservation (P4C)?

P4C is a diverse coalition that advocates for the interests and rights of land conservation donors and land trusts. We work to ensure the long-term availability and integrity of conservation easement donations. Our members include representatives from the entire conservation easement ecosystem, including individuals, private companies, land trusts, sportsmen’s organizations, and conservation groups. We are committed to supporting the highest professional standards in land conservation.

Who are P4C members?

P4C currently has members from more than 35 states and growing across all regions of the country including land trusts, local and national conservation groups, landowners (both individuals and companies), wildlife biologists, real estate professionals, attorneys, land planners, and other consultants and tradespeople involved in conservation.

What are your organization’s goals?

P4C has three primary objectives. First, we stand for the highest level of integrity and best practices in private land conservation through conservation easement donations and Section 170(h). Second, we conduct outreach to help educate decision makers and the public about the importance and success of conservation easement donations. And third, we hope to maximize land conservation to benefit future generations by advocating for the effective, fair and compliant implementation of conservation donations under federal rules.

100,000,000

The U.S. population is projected to grow by 100 million and the amount of land covered with housing, roads and shopping malls will nearly triple by 2050.

Source: Land Trust Alliance

2,200,000

We lose 6,000 acres of wildlife habitat every day. That’s 2.2 million acres — an area the size of Yellowstone National Park — every year.

Source: National Wild Turkey Federation - Save the Habitat. Save the Hunt.”

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