Conservation easements have been a source of controversy and, more recently, legal disputes, with contrasting perspectives from taxpayers and the IRS. This summary provides an overview of conservation easements, their contentious nature, and guidelines for executing them without attracting undue scrutiny.

What is a conservation easement?

A conservation easement involves donating the development rights of real estate that you own as a charitable contribution. The value of the deduction is determined by the difference between the property’s value with unrestricted development rights and its value with limited development rights. Once the development rights are restricted, they remain so permanently.

Who is the recipient organization?

To qualify as a charitable contribution, the conservation easement must be donated to a qualifying charitable organization. Various land trusts throughout the country specialize in accepting land and easement donations, ensuring compliance with the easement terms and activities on the property.

What are the qualifying conservation purposes?

Conservation easements serve broad purposes. Typically, they aim to protect natural habitats, preserve open spaces such as farms or forests, or safeguard historically significant lands or structures. Meeting these criteria is generally achievable.

Is donating a conservation easement equivalent to donating real estate?

No. Donors of conservation easements retain ownership of the real estate but with specific restrictions on their activities concerning the property.

What activities are allowed on real estate subject to conservation easement restrictions?

Conservation easements do not completely restrict the use of the property. Permissible activities may include timber harvesting, farming that does not harm conservation interests, construction of one or more residences while maintaining over 80% undeveloped land, and facilitating commercial or educational endeavors compatible with the property’s conservation values. However, it is advisable to consult experts as all activities on restricted properties may attract scrutiny.

Why does the IRS have concerns about conservation easements?

Conservation easements have been susceptible to abuse by taxpayers. Some property owners inflate the pre-easement value and underestimate the post-easement value with the help of real estate appraisers, leading to artificially inflated charitable contribution deductions. When real estate funds pool investor money for such purposes, the financial stakes increase exponentially.

In response, the IRS has focused on “syndicated conservation easements” that are marketed to investors seeking tax relief. These schemes often appear on the IRS’s annual list of scams, known as the “Dirty Dozen.” Syndicated conservation easements have been designated as listed transactions by the IRS, requiring taxpayers (typically organized as partnerships or limited liability entities) and their participants (partners/investors) to report specific transaction details on their tax returns. Taxpayers should view this reporting requirement as a potential precursor to an IRS audit.

Can individual taxpayer landowners benefit from conservation easements in their tax planning?

Certainly. Charitable conservation easements are allowed, but caution is necessary. Engage reputable real estate appraisers and attorneys who possess expertise in conservation easement regulations and adhere to both their letter and spirit. It may even be prudent to consider using a second appraiser to validate the initial appraisal’s accuracy.

Once the conservation easement is established, it is crucial to comply with the imposed restrictions. While certain uses and activities are permitted on restricted properties, it is advisable to consult the recipient charity and, if necessary, an attorney with expertise in conservation easement compliance to evaluate any personal or commercial uses.

In conclusion, charitable conservation easements can serve as effective tax planning tools, but it is essential to proceed with caution and meticulous adherence to the applicable regulations.