Enhanced tax incentive for conservation easement donations!
Congress renewed the enhanced tax incentive for conservation easement donations, making the incentive effective through December 31, 2011 and retroactive to January 1, 2010.
There are several ways a person can ensure their property is protected in the future from undesirable development. Each property protection mechanism has a variety of ways it could be implemented as well as strengths and weaknesses associated with it. Mid-Michigan Land Conservancy can provide advice on the strengths and weakness of each mechanism and how it could be applied to any given property. Ultimately, however, the property owner must decide what they are trying to achieve and the best way to reach their goals. Landowners should consult their own legal and financial advisers in addition to consulting information supplied by Mid-Michigan Land Conservancy.
When a person owns property they own the rights associated with the property. For example, they own the right to dig for minerals, to allow access to others, to build on the land, to farm the land, to harvest timber, etc. The owner may use an easement to give up certain rights to another person or entity. One example of an easement is giving access to the property to an utility company so they can check a meter or work on power lines. The owner still owns the property and all the remaining rights of the property.
In a conservation easement, the owner gives up rights that could affect the conservation or agricultural values, or both, of a property. Conservation easements are designed to protect the conservation and agricultural values of a property while the property remains in private ownership. Typically rights such as the right to subdivide or the right to develop are given to qualified accepting organizations. When the conservation easement is given to a qualified 501(c)(3) organization, the IRS recognizes the easement may reduce the value of a property and considers the lost value as a charitable donation.
A conservation easement is a legal document that is recorded with the county recorder, typically the Registered of Deeds in Michigan. For the IRS to recognize the conservation easement as a charitable gift, the easement must be given in perpetuity. While the easement donor may sell or give the property to another person, the conservation easement stays with the land. All future owners of the property must abide by the terms of the easement.
A conservation easement is a detailed document. A Baseline Document, recording the condition of the property at the time of the easement, must be completed and signed at the time the easement is recorded. A conservation easement typically takes several months to complete.
In a fee simple donation, the property owner donates the property to a conservancy. The donation can take several forms. It can be an outright donation while the owner is still living. Alternatively the donation could be done through a will at the death of the donor. Another option, called a remainder interest, allows the property to be donated immediately but the donor resides on or utilizes the property for their lifetime.
When the property is donated to a qualified 501(c)(3) organization, this qualifies it as a donation to a charitable organization. The donation may qualify as a deduction on your federal income taxes. The donor must consult with their own advisors to determine the value of the donation. The conservancy may not take part in valuing the donation.
In a bargain sale, the property is sold to a conservancy for significantly less than the market value of the land. The difference between the market value and the bargain sale value may be considered a charitable donation.
The incentive, which now applies to donations in 2010 and 2011:
This package extends the S Corporation donation incentive and the IRA Charitable Rollover through 2011.
This package also extends the 2001 law that removed the geographic limitations from the section 2031(c) estate tax exclusion for land protected by a conservation easement, through December 31, 2012. That means, even with a $5 million unified credit and 35% rate, landowners may still realize up to a $175,000 estate tax benefit for donating a conservation easement.
Frequently Asked Questions about the Enhanced Easement Incentive
The enhanced easement incentive:
Without the enhanced easement incentive, a landowner earning $50,000 a year who donated a $1 million conservation easement could take a $15,000 deduction for the year of the donation and for an additional 5 years – a total of $90,000 in tax deductions.
The enhanced easement deduction allows that landowner to deduct $25,000 for the year of the donation and then for an additional 15 years. That’s $400,000 in deductions. If the landowner qualifies as a farmer or rancher, they can zero out their taxes. In that case, they could take a maximum of $800,000 in deductions for their million dollar gift.
One can never deduct more than the fair market value of the gift. This change simply allows landowners who previously could not deduct the full value of their gift to deduct more of that value.
The enhanced easement incentive defines a farmer or rancher as someone who receives more than 50% of their income from “the trade or business of farming”. The law references an estate tax provision (Internal Revenue Code (IRC) 2032A(e)(5)) to define activities that count as farming. Specifically, those activities include:
The qualified farmer or rancher provision also applies to farmers who are organized as C corporations. For an easement to qualify for the special treatment, it must contain a restriction requiring that the land remain “available for agriculture”.
This enhanced easement incentive applies to the various specific gifts of partial interests in land specified as a “qualified real property interest” under IRC 170(h)(2).
The enhanced incentive provides special treatment for certain donations (those qualifying under section 170(h), allowing the donor to deduct 50% of AGI and carry forward their deductions for 15 years. They can deduct 100% of their AGI if they are a "qualified farmer or rancher."
That treatment clearly does NOT apply to gifts of land in fee, gifts of a donor's entire interest in a piece of land, or to gifts of an undivided interest in a piece of land, which are deductible under the same terms as other charitable donations of capital gain property -- up to 30% of AGI, with 5 years carryover).
A person whose income is modest compared to the value of their land, who has been considering a gift of land in fee, may want to consider a gift of a partial interest qualifying under section 170(h) instead, if the more favorable treatment of such gifts is important to them.
They have three options:
All of these have their complications and expenses. But there is nothing in these gifts that would preclude the landowner's option to donate the remainder of their rights (the rights not previously given to the donee in the conservation easement, their life estate interest, or their mineral rights) at some later date.
Such a second donation would be treated as an ordinary charitable donation of capital gain property, subject to the 30%, 5 year carryover rules.
A caveat: A "qualified farmer or rancher" who wishes to do this will not, in most cases, be able to benefit from the 100% AGI deduction by this means, because to qualify, their donation must, according to the legislation, include a restriction requiring that their land remain "available to agriculture".
Please note: This is our careful reading of the legislative language, and we think it is a reasonable one and consistent with Congressional intent. It is not legal advice. if considering one of these strategies you may wish to consult one or more of the tax guides available on our publications page.
The enhanced easement incentive does apply to bargain sales of conservation easements that qualify under IRC 170(h). It will not apply to donations of land in fee, or to bargain sales of fee title to land.
In order for a landowner selling a conservation easement in a bargain sale to qualify as a "farmer or rancher" they may need to consider an installment sale. The income received from the sale of the conservation easement probably will not be viewed as "income from the trade or business of farming" by the IRS, and this income could disqualify them. However, to be qualified as a farmer or rancher the IRS only needs to qualify the donor's income in the year of the donation, a farmer could arrange an installment sale that would provide him little sale income in that year, but provide the balance to him in the next year, which could allow him to qualify for the 100% deduction.
The expanded incentive applies to all donations covered in IRC section 170(h)(2), which includes donations of the entire interest of the donor other than a qualified mineral interest; a remainder interest; or a permanent conservation or historic preservation easement.
Under the enhanced easement incentive, C-corporations whose gross income from farming is more than 50% of their total gross income, and whose stock is not publicly traded on a recognized exchange, are treated as an individual and qualify to take a deduction for a conservation easement donation of 100% of their adjusted gross income (AGI) and may carry over unused deductions for 15 years.
Other C-corporations remain limited to a deduction of no more than 10% of their AGI for a gift of a conservation easement, and may carry over unused deductions no more than 5 years.
Donations by S-corporations are passed through to their stockholders, and they, as individuals, benefit from the enhanced easement incentive as other individuals. If the S-corporation's income is solely from farming, however, at this time (pending guidance from IRS) we believe that each stockholder would have to meet the test for a "qualified farmer or rancher" on their own, as an individual, in order to benefit from the 100% AGI deduction limit.
A separate provision renewed along with the easement incentive, the "S Corporation Donation Incenitve," allows most S corporation shareholders to deduct their share of the full fair market value of a charitable contribution made by the company without regard to their “basis.” Read more.
The enhanced easement incentive applies to all easements donated between January 1, 2006 and December 31, 2011. While the incentive expired for several months in 2008 and most of 2010, it was renewed retroactively such that there was no gap in eligibility.
Conservation easement donations are subject to the same restrictions as they were before. For example, easements must meet the “conservation purposes” test defined in the existing law; they cannot be donated as part of a “quid pro quo” agreement; and they must be donated to a qualified organization -- a governmental unit or a publicly-supported charity that has “a commitment to protect the conservation purposes of the donation, and …the resources to enforce the restrictions.”
Learn more about Treasury Regulations on conservation easement donations.
Taking advantage of the enhanced easement deduction will not necessarily affect one’s likelihood of being audited. All donors should note, however, that the IRS has been increasing the number of tax returns it audits – the number has doubled in the last two years. The IRS has also indicated that high value donations of property – including donations of conservation easements -- will receive more attention from the IRS than most tax returns.
style='margin-bottom:12.0pt'>That makes it particularly important for a donor to know and follow the law, and utilize a reputable, professional appraiser who has experience in the appraisal of conservation easements.
Under the new law, the definitions of substantial and gross misstatements of value have been changed. Previously, a taxpayer whose donation was finally determined to be worth $200,000 would have been guilty of a substantial misstatement if they had claimed a value of $400,000, and guilty of a gross misstatement if they had claimed a value of $800,000. Now, they would be guilty of a substantial misstatement for claiming a value of $300,000, and of a gross misstatement if they claimed a value of $400,000. There are substantial additional tax penalties for such misstatements for the taxpayer, and they make the appraiser subject to penalties of up to 125% of their fee plus potential disbarment from working on federal tax matters.
The law also redefines who is a “qualified appraiser”, and gives the IRS the power to issue new regulations on appraiser qualifications. This is important: as of the date of enactment of this law, appraisers will need to show donors that they are qualified under the new law and any new Treasury regulations or guidance that may follow from it. Lastly, the law states that a qualified appraiser must “demonstrate verifiable education and experience in valuing the type of property subject to the appraisal.”
These new rules apply not just to conservation easements, but to all charitable donations of property.
It is possible that appraisals for conservation easements will be marginally more expensive. But these reforms are important steps towards ensuring that appraisals accurately reflect the value of charitable gifts.
The new law tightens the rules for easements on “certified historic structures.” If you are protecting a property that includes such a structure (e.g. a farm with a historic stone barn that is listed in the National Register) these new regulations may apply to you. Donors and donees of easements protecting historic structures need to understand the new rules, which include a filing fee for donors and specific appraisal requirements.
Some of the new rules apply to historic structure easements donated as early as July 25, 2006. Any donor who has donated a historic preservation easement since that date should be made aware of the new rules.
There is no change in the law for easements covering battlefields or other land with historic value. IRC 170(h)(4)(A)(iv) distinguishes between “historically important land areas” and “certified historic structures”. Only easements protecting the latter should be affected by the new law.
The new law applies to all donations made after the date of enactment of this new law. The law makes these reforms permanent. As noted above, sections of the legislation applying to historic preservation easements are retroactive and apply to easements donated since July 25, 2006. These reforms do not expire.
Yes! The IRS has changed the instructions for Form 8283, and now asks for additional information from easement donors. In addition, the IRS has revised Form 990 – the tax return all charities complete. The IRS has also changed Form 1023, the application for nonprofit status, and in 2004 issued a cautionary notice regarding conservation donations. Please see our other pages on:
As a donor, whether considering a donation of land or a conservation easement, there are many federal tax regulations you must follow to ensure proper credit for a charitable gift. This page outlines the various rules that landowners and their advisors should be aware of, starting with general rules for all donations, before proceeding to enhanced incentives.
Of course, this page is no substitute for independent legal and tax advice. It is the donor’s responsibility to ensure that charitable gift of land or easements meet all federal and state tax law requirements.
A taxpayer who donates land, an easement or other personal or real property to a public charity or government agency may generally deduct its full fair market value (less any bargain sale payments), but such deductions are usually limited to 30 percent of the donor’s adjusted gross income in any given year (10 percent for C corporations), with the remaining value carried forward for up to five additional years. The sole exception to these general limits is the enhanced easement incentive, discussed below.
IRS Form 8283 is required for all non-cash contributions valued at greater than $500. It was most recently updated in 2006. The 2004 law on appraisal requirements clarifies, among other things, that a “qualified appraisal” is required for most gifts of property for which a deduction of more than $5,000 is claimed. The appraisal must be conducted no earlier than 60 days prior to the contribution and no later than the due date of the return. The IRS Chief Counsel also recently confirmed that both the Form 8283 and the appraisal must be signed by the individual who conducted the appraisal, not just the appraiser’s firm. While the recipient organization’s signature on Form 8283 does not represent agreement with the claimed value, the IRS has asked that land trusts use common sense in questioning appraisals that seem inflated. Additional appraisal and substantiation requirements specific to conservation easements are discussed below.
Seaction 170(f)(8) of the Internal Revenue Code clearly states that all charitable gifts valued at $250 or more must be substantiated by a letter acknowledging the gift and stating that the donor received no goods or services in return (or estimating the value of goods provided in the case of a bargain sale). This requirement applies to easement donations, and several recent cases, including Bruzewicz and Gomez, have denied deductions on this basis. The IRS states that neither the Form 8283 nor language in the easement itself can substitute for such a letter. Although two recent tax court cases, Simmons and Consolidated Investors, suggest that substantial compliance may be adequate, land trusts shouldn't risk exposing their donors to the possibility of an audit to find out. Land trusts not providing such a letter to easement donors should do so immediately! It is far easier to write a short and simple thank-you letter (or e-mail) than to explain why you didn’t. IRS officials have also suggested that donors attach a copy of this letter to their tax return so that revenue agents won't have to launch an audit just to find out if it exists. The land trust should also keep a copy in case the donor loses their letter.
Since 1976, conservation easement donors have benefited from a special exception to the general rule against charitable deductions for partial interests in property. To qualify for a deduction, such donations (and bargain sales) of easements must satisfy specific conservation purposes and other requirements that do not apply to gifts of land in fee. The 2006 Pension Protection Act created additional appraisal requirements that remain in effect even if the enhanced easement incentive, discussed below, expires. Also be sure to follow the substantiation rules, discussed above.
The legal text that creates a federal income tax deduction and establishes the required conservation purposes for “qualified conservation contributions,” which include a perpetual conservation or historic preservation easement, a remainder interest or the entire interest of the donor other than a qualified mineral interest.
An essential resource that elaborates on section 170(h) and imposes more specific requirements for a donation to qualify. These include requirements such as mortgage subordination and the treatment of mineral rights that are discussed at length in our tax publications. Mineral rights can be a particularly tricky issue, for which we recommend CCLT's Mineral Development and Land Conservation.
A 2006 law (PL109-280) that redefines who is a “qualified appraiser” and sets higher penalties for abusive appraisals. It also tightens rules for easements on “certified historic structures,” discussed below. These reforms remain in effect even if the enhanced easement incentive (also created by that law) expires. Please see:
It’s critically important for land trusts and donors to be aware that the new instructions for Form 8283 impose a requirement for conservation easement donors to attach a supplemental statement answering questions that aren’t reflected on the form. Recent experience suggests that the IRS takes these questions very seriously and a sufficiently detailed "supplemental statement" ought to be 5-10 pages long. IRS officials also emphasize that an address is not an adequate "description of donated property" and have suggested attaching the entire recorded easement and baseline report.
In late 2006, the IRS issued guidance defining "qualified appraiser" and clarifying that appraisals with respect to returns filed on or before August 17, 2006 did not need to meet the new Pension Protection Act requirements.
This letter confirms that conserved lands need not protect endangered species to qualify as protecting "a relatively natural habitat of fish, wildlife or plants."
Attorney Stephen Small’s article in Tax Notes (2004) reviewing the tax law of conservation easements, particularly related to developer donations, and highlighting abuses that are raising concerns with the IRS.
Inspired by a 2004 Washington Post series, Congress and the IRS have greatly increased their scrutiny of conservation easements in recent years. The Alliance is fighting overzealous easement audits through Congress, the courts, the tax press and direct engagement with IRS leadership, but some mistakes and outright abuses still exist. Our easement audits page may help you avoid audits in the first place by highlighting IRS concerns and the emerging case law from audits that have gone to court. Also see:
Estate taxes can lead to the break-up, sale and development of family-owned farm, ranch and forest lands, even when landowners would prefer to keep these lands intact. A June 1998 tax bill expanded the estate tax benefits for donated conservation easements. While the federal estate tax expired at the end of 2009, it will return at a $5 million unified credit and 35% rate in 2011. Many families can benefit from both estate tax AND income tax benefits of donating a conservation easement.
The most broadly applicable estate tax benefit of a conservation easement is the federal recognition that property encumbered by a conservation easement is valued for estate tax purposes as restricted, rather than at its unrestricted value. While this may seem common sense, it's helpful that Section 2055(f) of the Internal Revenue Code explicitly recognizes this to be the case. That section relates to donations by will, but the reduction has also been recognized for existing easements and post-mortem donations. In most cases, the reduction will apply even if the easement was sold or donated by a previous owner, without regard to qualification under section 170(h).
Section 2031(c) of the Internal Revenue Code provides an estate tax exclusion of up to 40 percent of the remainder value of land protected by a "qualified conservation easement." That exclusion is capped at $500,000 and is further reduced if the easement reduces a property’s value by less than 30 percent. To qualify, an easement must meet all the requirements of a "qualified conservation contribution" under section 170(h). In addition, to be a "qualified conservation easement," it must prohibit all but “de minimis commercial recreational use” and cannot qualify solely for purposes of historic preservation. This benefit is limited to the family of the original easement donor, although it can be taken by each spouse and subsequent generations. Donations by will and post-mortem donations are also eligible, but please note that such donations forego the opportunity for an income tax deduction. Prior to 2001, the 2031(c) exclusion applied only to properties near metropolitan statistical areas, national parks, wilderness areas and urban national forests (see map) -- section 101 of H.R. 4853 just lifted these restrictions through 2012! For more, see:
Section 2032A of the tax code allows for the valuation of family farms at their agricultural value, with or without a conservation easement, but the requirements for taking this election are so complex that it is rarely used. Because both 2032A and 2031(c) are subject to caps, some landowners may benefit from taking both elections. Some state inheritance or estate taxes also provide for agricultural valuations and at least one, Pennsylvania, provides an additional benefit for land under easement. Farm estate planning is an extremely complicated process and you need to identify a competent local expert.
In addition to the federal tax incentives for conservation, donors may enjoy additional tax benefits on the state or local level.
The most powerful state incentives for conservation are the transferable tax credits available in Colorado, New Mexico, South Carolina and Virginia. Such credits can be sold to an individual or corporation with high tax liability, generating immediate income for the donor. Arkansas, California, Connecticut, Delaware, Georgia, Iowa, Maryland, Massachusetts, Mississippi and North Carolina offer some form of non-transferable income tax credit. All but Arkansas, Colorado, Maryland and Mississippi apply to some fee-simple land donations as well as conservation easements. New York offers a unique tax credit, not at the time of donation, but every year in an amount equivalent to 25 percent of the property taxes paid on land under easement. Read more.
It seems common sense that the assessed value of land should be reduced when it is encumbered by a conservation easement, but in practice, the property tax treatment of land under easement varies by state, county, town and sometimes the discretion of individual assessors. One unique property tax benefit is Florida’s Amendment 4, which provides a 50-100 percent property tax exemption for land under easement.
When designing tax incentives for conservation, the federal government recognized that many properties with high conservation values, including some family farms, are held in a corporate ownership structure. As such, most of the tax benefits for conservation are also available to corporations. The complexities of a corporate ownership structure make it even more important to seek independent tax advice, but here are some general considerations.
S corporations and most partnerships are “pass through entities,” meaning that the tax implications of a charitable contribution by the business “pass through” on a proportional basis to the individual tax returns of its shareholders. Thus, tax deductions are divided proportionally and subject to the AGI limits discussed above. Each shareholder must independently qualify as a “farmer or rancher” to take the 100 percent deduction under the enhanced easement incentive.
Historically, charitable deductions by S corporation shareholders have been limited to their “basis” in company stock – a limitation that has killed many important conservation deals. A little-noticed provision of the 2008 “bailout” package lifted this restriction, allowing most S corporation shareholders to deduct their share of the full fair market value of a contribution made by the company without regard to their “basis.” This provision was just extended through 2011 by section 752 of H.R. 4853!
C corporations pay taxes as corporate entities, and non-cash charitable deductions are generally limited to 10 percent of their adjusted gross income. The enhanced easement incentive only applies to a C corporation if 50 percent of its gross income comes from “the trade or business of farming,” in which case the company could deduct up to 100 percent of its income for up to 16 years.
Donations of preservation easements on certified historic structures (or
“façade easements”) may qualify for the same federal income tax benefits
available for conservation easements. Past abuses have led Congress and
the IRS to apply even greater scrutiny to façade preservation agreements and
these transactions should be undertaken only using the most scrupulous and
conservative methods with highly reputable preservation entities and other
experts.
In 2006, Congress instituted a number of reforms, beyond
those applicable to conservation easements, including a requirement to protect
the entire exterior of the property and a $500 filing fee. Please see the
following resources from the National Trust for Historic Preservation:
