Don’t exit this blog post yet – I know, the very name “conservation easement” invites yawns! But the concept is great – you create some permanent restrictions on your property to, say, preserve an area for outdoor recreation or to protect open space or to save a breathtaking view, or maybe even to preserve a historic structure and then get rewarded from Uncle Sam with a healthy charitable contribution on your income tax return* and possibly some estate tax goodies as well. The contribution is based on the decline in market value that you “suffer” from imposing the easement on yourself and future owners. The upside is you retain partial ownership of the property while doing good for society (and, let’s be honest, for yourself as well. This is (sort of) the very definition of having your cake and eating it too….. Now, of course, not everyone can do this. You have to have the right property from a conservation/preservation viewpoint, you will need to get a qualified charity involved to administer the plan, and you (and future owners) will have to give up a certain amount of control over the property. But under the right circumstances for the right taxpayer, a conservation easement can be a wonderful income and estate planning tool. As one might expect, easements have been pretty popular for a number of years.
Here’s an example. Minnie Gotrocks grants a perpetual conservation easement on some undeveloped land she owns in the Berkshires to a qualified charity. As part of the easement, she gives up her development rights on the property. Without the easement, the property is easily worth $8,000,000, however, because the property can no longer be developed, its value drops to $5,000,000. By properly dotting the I’s and crossing the T’s, Minnie is entitled to a $3,000,000 deduction* on her income tax return and may also be able to claim some healthy discounts on her estate tax return when the time comes. Best of all, she still owns the property and can use it as she wants so long as she does not violate the terms of the easement.
Pretty good, huh? So, what’s the catch? Big brother and his insatiable love of paperwork, of course. According to Karin Gross of the Internal Revenue Service, there are an enormous number of docketed cases currently pending in Tax Court (approximately 216) and “we’re winning the cases for the most part.” The two biggest issues with respect to these transactions are substantiation, or lack thereof, and overvaluation. So the message is clear – if this type of planning appeals to you, then make sure you work with the right people. National organizations like the Nature Conservancy and the Land Trust Alliance or local land trusts can accept your gift and steward it properly while providing you with the proper documentation required by IRS. Qualified appraisers are a must – the appraisal must properly calculate and support the diminution in fair value in order to qualify for the deduction. And a competent attorney who is skilled in these areas will help pull it all together. Don’t skimp. The reward will be well worth it.
* Subject, of course to limitations based on income or other factors.