Blue Mountain Land Trust

The donor of a conservation easement who claims a value in excess of $5,000 must be certain to comply with all federal substantiation requirements. In order to claim an income tax deduction, the value of the conservation easement must be determined by a qualified appraisal. The appraiser you choose should have experience with development rights appraisals since it is possible that the Internal Revenue Service will look closely at your claims. An appraisal includes, among other things:

• a description of the property,
• the method of valuation used to determine the fair market value of the property,
• certain information about the appraiser and his or her qualifications, and
• a description of the fee arrangement between the donor and the appraiser.

A "fully completed appraisal summary" must be reported on IRS Form 8283 and attached to the donor's income tax return. The form includes information identifying the donee, the appraiser, and the property. The summary must be signed by the appraiser and the donee organization, although the donee's signature does not represent concurrence in the appraised value of the donated property.

Description of the property

The appraiser should be given a copy of the conservation easement deed.

Indicate the property's physical limitation for potential development so that the appraiser can make a reasonable, rather than an inflated, estimate of value. For example, the applicable zoning on lands contemplated for a gift of easement may fail to take into account restrictions on development, such as flood plains or inadequate soil percolation for septic tanks, or unstable soils.

Indicate what adjacent lands, if any, are in the landowner's ownership so that the appraiser can take into account any potential enhancement to their value resulting from the easement. (See Internal Revenue Ruling 76-376, Cum. Bul. 53, which addresses this requirement.)

Method of valuation

The opinion of value should take into account the precise restrictions that the easement imposes and the specific uses retained by the landowner. Stress the need for adequate documentation in the appraisal, such as the facts associated with any sale the appraiser cites as comparable, and by what line of reasoning the appraiser deduces an estimate of value for the subject property.

Appraiser's qualifications

A "qualified appraiser" must be qualified to make appraisals of the type of property being valued. The final appraisal report must include a listing of the appraiser's background and qualifications, especially regarding appraisals of easements. The appraiser cannot be a person whose relationship to the taxpayer or the donee organization would cause a reasonable person to question the independence of such an appraiser.

The terms of the easement are recorded in a deed, and the Land Trust assumes responsibility for monitoring the property to preserve its natural values.

Validity of deduction claim

The only way for a donor to be certain that the easement donation is tax deductible is to seek a private letter ruling from the IRS before granting the easement. To get a private letter ruling, the easement donor and their attorney give the IRS the facts of the proposed transaction and what the donor believes to be the controlling law. The taxpayer asks the IRS to rule that the proposed transaction will indeed meet the requirements of the law and that the tax treatment suggested by the taxpayer will apply. A private letter ruling tells easement donors whether or not their contributions will qualify for an income tax deduction. The IRS will not issue a letter ruling on the amount of the deduction.

A conservation easement that does not meet IRS requirements may still be a valid easement if it meets relevant requirements of state law. The grantor may be subject to a gift tax on the easement's value. Many donors and advisors are unaware of the gift tax consequences that ensue if the IRS requirements are not met. A conservation easement that is not deductible on the grounds that it does not meet the specific conservation purposes test in IRC section 170(h) is not subject to a gift tax.

It is essential that you consult with your tax advisor and attorney to ensure that your appraisal complies with the most recent IRS rules and regulations.

For more general information, you may consult the following references:

• IRS Form 8283, Donee Information Return
• IRS Publication 526, Charitable Contributions
• IRS Publication 561, Determining the Value of Donated Property
• Land Trust Alliance & the National Trust for Historic Preservation, Appraising Easements: Guidelines for the Valuation of Historic Preservation and Land Conservation Easements, 2nd Ed., Washington, D.C., 1990.
• Small, Stephen J., The Federal Tax Law of Conservation Easements, Land Trust Alliance, Washington, D.C., 1986, Supplement 1989.

What rights does the owner retain?

All rights of ownership, which have not been transferred to the Land Trust, are retained by the current owners. The conservation easement does not restrict the owners' right to sell the property or leave it to their heirs in a will or trust. However, the new owners are bound to recognize and honor the original restrictions placed on the use of the land.

The landowner decides whether or not to allow public access. If a landowner permits public access, it is usually only for a specific area of the property.

What does the land trust do?

As the easement holder, the Land Trust prepares a plan for the stewardship of the property, implements any restoration and enhancement aspects of the plan, supervises any public uses of the property, and monitors the property to ensure that it is adequately protected.

A stewardship fund is created in conjunction with the acceptance of each conservation easement. It is used for that property to cover future expenses of restoration, monitoring, enforcing compliance with easement restrictions, and underwriting legal defense of the easement protections.

When necessary the Land Trust takes appropriate action to enforce the terms and conditions of the easement by mediation, arbitration or legal action.

Are there tax benefits from granting a conservation easement?

Conservation easements qualify as charitable deductions from income taxes, if certain IRS rules and criteria are satisfied.

To be deductible, an easement must serve conservation purposes by preserving natural habitat, historic sites, unique scenic landscapes, wildlife corridors or connections to other protected parcels, areas of concern for public education or recreation, or open spaces in the vicinity of intense land development. To qualify as a charitable gift, donation of use or development rights through a conservation easement must be granted in perpetuity to a qualified conservation organization.

The gift value, determined by a qualified appraiser hired by the landowner, is the difference between the fair market value of the property before and after the easement is donated.

If tax reduction is an important consideration, the land trust strongly recommends that the landowner consult with a tax advisor before proceeding with an easement.

(reprinted with permission from Columbia Land Trust)