1. Who determines whether a conservation easement qualifies the donor for a reduction in income and or estate taxes?
Federal tax law, Code Section 170(h), as interpreted by IRS Regulations Section 1.170A, governs the tax treatment of conservation easements (see Legal Resources). To determine whether a proposed agreement will meet the designated charitable gift requirements, experienced accounting or legal counsel should be consulted. Also, Stephen Small's book, The Federal Tax Law of Conservation Easements, (see Book List) provides valuable information on this subject.
2. What basic criteria does the IRS use
to determine whether a donated conservation easement meets the
gift donation standards?
a. An easement must be granted in perpetuity.
b. An easement must meet at least one of the following conservation purposes:
- protection of relatively natural habitat for wildlife, fish, or plants
- preservation of open space, including farm and forest land, where such preservation is
a) for the scenic enjoyment of the general public, or
b) pursuant to a clearly delineated Federal, State, or local governmental conservation policy, and will yield a significant public benefit, or
c) the preservation of an historically important land area or a certified historic structure.- the preservation of land areas for outdoor recreation by, or the education of, the general public
- (**The "public benefit" criterion stated above does not require public access. Donors decide whether or not to grant this condition in the conservation easement.)
c. The easement must be granted to a qualified organization.
d. The easement must prohibit surface mining.
e. Data documenting the conservation values of the property, a Baseline Inventory, must be collected prior to the donation of the easement.
3. When a conservation easement meets the
federal requirements as a charitable gift, what tax benefits may
the donors receive?
The Palmer Land Trust encourages all potential donors to seek professional advice from their financial planners or lawyers before assuming the type and amount of benefit available. Normally two kinds of federal tax relief are associated with conservation easements.
a. Income Tax Deductions:
Federal law provides two schedules for deducting the value of qualified gifts owned for more than one year:
- The standard charitable deduction is limited to a maximum of 30% of the donor's Adjusted Gross Income for the year in which the gift is made. If the deductible value of the gift exceeds this amount, the remaining balance qualifies for subsequent deductions during the next five years, using the same criteria.
- An alternative method uses the property's original purchase price or inherited value as the current market appraisal. The difference between this figure and the reduced value resulting from the easement's restrictions qualifies for a 50% maximum gift deduction from Adjusted Gross Income, using the same six-year period if necessary.
b. Estate Tax Reduction:
Normally a conservation easement will reduce the fair market value of a property. When an estate settles, Federal appraisers use fair market or best use standards to determine the worth of property assets. Depending on surrounding land use, the development or subdivision potential of a property may significantly elevate the taxable value of this asset. A conservation easement removes this appreciated potential from the estate, often substantially lowering the federal estate tax burden.
4. What other federal tax benefits may a donor
receive?
Expenses involved in making a charitable contribution, including the legal, accounting, appraisal, and Baseline documentation fees qualify as deductible business expenses. Contributions of cash or securities to the land trust's Easement Stewardship Fund are considered charitable gifts.
5. Will a conservation easement affect Colorado
property taxes?
Colorado Revised Statute 38-30.5-109 states that real property subject to one or more conservation easements in gross shall be assessed with due regard to the restricted uses to which the property may be devoted. Colo. Rev. Stat. ßß 39-1-102 to -103 lists the real estate criteria that qualify easement lands for the agricultural tax rates (see Legal Resources). The law also provides that easements placed on land presently assessed at agricultural levels will forever be valued at agricultural levels despite changes in use on the property. To qualify for this provision, the parcel must contain at least 80 acres or, if less, it may not have a residence or commercial structure on it at the time of the easement.
6. Will a conservation easement affect Colorado income taxes?
For a conservation easement created in accordance with article 30.5 of title 38, C.R.S., that is donated on or after January 1, 2007, to a governmental entity or a charitable organization described in section 38-30.5-104 (2), C.R.S., the credit shall be an amount equal to fifty percent of the fair market value of the donated portion of such conservation easement when created; except that in no case shall the credit exceed three hundred seventy-five thousand dollars per donation. Colorado law provides that donors of conservation easements may transfer their tax credits to other Colorado taxpayers. An individual must expend all of their conservation easement tax credits before obtaining additional credits.
7. Do corporate landowners receive tax benefits
for donating conservation easements?
Yes, "C" Corporations may deduct up to 10% of their annual net income, based on the preceding year's figures, for charitable donations of conservation easements. Unused balances, applying the same 10% limitation, may be deducted over the next five years.
8. Who determines the gift value of a conservation
easement?
To obtain a tax deduction for a gift worth more than $5,000.00, donors must secure a qualified appraisal by a qualified appraiser and report the results to the IRS on Form 8283 with that year's annual income tax return. The appraiser will collect information on recent sales of comparable properties, assess adjacent land uses, consider the appraised values of other conservation properties, and factor in the specific terms of the conservation easement to determine fair market values for the property with and without the restrictions. The difference between these figures becomes the amount of the charitable gift.