Under a conservation easement, a property's owner gives up the right to make certain changes to that property, to preserve it for future generations. Such an easement usually limits the usefulness of the property and lowers its value. When a conservation easement meets criteria spelled out in the Internal Revenue Code, the owner may qualify for a tax deduction based on the property's reduction in value.
Easements that can qualify for deductions
Four types of conservation purposes may qualify for tax deductions:
- Easements that protect natural habitats for fish, wildlife or plants.
- Easements that preserve land for public recreational or educational use.
- Easements that preserve "open space," or undeveloped land.
- Easements that preserve land or certified historic structures.
A property owner creates a deductible conservation easement by donating some or all property rights to a qualified party. For example, the owner of a historic building might give a local historical preservation society the right to overrule any proposed change to the building's exterior.
Rules for donating property rights
For a conservation easement to be eligible for a tax deduction, the property rights must be donated for conservation purposes to what the tax code calls a "qualified conservation organization." These can include certain:
- governmental units
- and some other tax-exempt groups
Further, according to the law, the organization receiving the easement must have the resources to enforce its restrictions and demonstrate a commitment to enforcement.
Also, an easement can be deductible only if the easement’s conservation purpose is protect "in perpetuity"—meaning forever. In other words, not only will the current property owner be bound by the easement, but so will all future owners of the property, as well as any lenders who might write loans using the property as collateral.
To ensure this, easements must be written into public records, such as deeds.
Determining the value of the easement
One of the biggest stumbling block when it comes to taking a tax deduction for a conservation easement is putting a dollar value on the easement. The law requires an appraisal to determine the fair market value of the property rights being surrendered—a value that can be extremely difficult to pin down.
According to the "Journal of Accountancy," the IRS frequently finds itself engaged in disputes with property owners over the value of an easement. Professional assistance in setting easement values is an absolute necessity. Overstating the value can lead to overstating the tax deduction, and that can expose property owners to fines, penalties and potentially even criminal prosecution.
Taking the deduction
A conservation easement that qualifies for a tax deduction is considered a non-cash charitable contribution. Special rules apply for charitable deductions of conservation easements. The amount of the deduction as well as other characteristics can vary based on how the person or entity uses the property that is being conserved.
Taxpayers report conservation easements and other non-cash charitable contributions by filing Form 8283 with their tax return.
From 2006 to 2014, a tax incentive temporarily boosted the allowable deduction for conservation easements to 50% of AGI, or 100% for certain ranchers and farmers. This original incentive had expired at the end of 2014 but has since been restored and made permanent by legislation passed in 2015.