Conservation Donation Rules
As a land trust or donor, whether considering a donation of land or a conservation easement, there are many federal tax regulations you must follow to ensure proper credit for a charitable gift. This page outlines the various rules that landowners, their advisors and land trusts should be aware of, starting with general rules for all donations, before proceeding to enhanced incentives. For a more basic introduction, see our Landowners Page and Steps to Donate a Conservation Easement.
Of course, this page is no substitute for independent legal and tax advice. A can help identify local experts, or visit our . We also recommend referencing one of the excellent tax guides from our when considering any land or easement transaction. As discussed in Standard 10 of Land Trust Standards & Practices, land trusts should work diligently to see that every charitable gift of land or easements meets federal and state tax law requirements, but ultimately it is the donor’s responsibility to ensure that these requirements are met.
- Rules for All Non-Cash Charitable Donations
- Rules Specific to Conservation Easement Donations
- Using the Enhanced Easement Incentive
- Using the Estate Tax Benefits for Conservation Easements
- State and Local Tax Benefits of Conservation Donations
- Additional Requirements for Easements on Historic Structures
- For Further Reading
A taxpayer who donates land, an easement or other personal or real property to a public charity or government agency may generally deduct its full fair market value (less any bargain sale payments), but deductions for donations of "capital gain property" are usually limited to 30 percent of the donor’s adjusted gross income in any given year (10 percent for C corporations), with the remaining value carried forward for up to five additional years. The sole exception to these general limits is the enhanced easement incentive, discussed below, that will expire at the end of 2013. (IRS Pub 526 has a worksheet to help you calculate these limitations.)
Form 8283 and Appraisal Requirements
IRS Form 8283 is required for all non-cash contributions valued at greater than $500. The form and its instructions were most recently updated in December 2012. The clarifies, among other things, that a “qualified appraisal” is required for most gifts of property for which a deduction of more than $5,000 is claimed and must be attached for deductions exceeding $500,000 (IRS officials suggest always attaching). The appraisal must be conducted no earlier than 60 days prior to the contribution and no later than the due date of the return. The IRS Chief Counsel also recently confirmed that both the Form 8283 and the appraisal must be signed by the individual who conducted the appraisal, not just the appraiser’s firm. While the recipient organization’s signature on Form 8283 does not represent agreement with the claimed value, the IRS has asked that land trusts use common sense in questioning appraisals that seem inflated (also discussed as Practice 10D of Land Trust Standards & Practices). Please remember that the "Qualified Conservation Contribution" checkbox is only for easements; gifts of land in fee should be listed as "Other Real Estate." Click here for more practical pointers on form 8283. Additional appraisal and substantiation requirements specific to conservation easements are discussed below.
Contemporaneous Written Substantiation
Section 170(f)(8) of the Internal Revenue Code that all charitable gifts valued at $250 or more must be substantiated by a letter acknowledging the gift and stating that the donor received no goods or services in return (or estimating the value of goods provided in the case of a bargain sale). This requirement applies to easement donations, and several recent cases, including and Gomez, have denied deductions for the lack of a "goods and services letter." The IRS states that neither the Form 8283 nor language in the easement itself can substitute for such a letter. Although two recent tax court cases, and Consolidated Investors, suggest that substantial compliance may be adequate, land trusts shouldn't risk exposing their donors to the possibility of an audit to find out. Land trusts not providing such a letter to easement donors should do so immediately! It is far easier to write a short and simple thank-you letter (or e-mail) than to explain why you didn’t. IRS officials have also suggested that donors attach a copy of this letter to their tax return so that revenue agents won't have to launch an audit just to find out if it exists. The land trust should also keep a copy in case the donor loses theirs.
- Details on Substantiation Requirements and Sample Letters
- Practical Pointers on Substantiation Letters
IRS Guidance on Substantiation and Disclosure Requirements
- IRS Publication 1771–Substantiation and Disclosure Requirements
- Proposed Rule on Substantiation and Reporting Requirements for Charitable Contributions -- serves as "guidance" until the rule is final
- Transitional Guidance on Appraisal Rules in the 2006 PPA
Since 1976, conservation easement donors have benefited from a special exception to the general rule against charitable deductions for partial interests in property. To qualify for a deduction, such donations (and bargain sales) of easements must satisfy specific conservation purposes and other requirements that do not apply to gifts of land in fee. The 2006 Pension Protection Act created additional appraisal requirements that remain in effect even if the enhanced easement incentive, discussed below, expires. Also be sure to follow the substantiation rules, discussed above.
The tax code section that creates a federal income tax deduction and establishes the required conservation purposes for “qualified conservation contributions,” which include a perpetual conservation or historic preservation easement, a remainder interest or the entire interest of the donor other than a qualified mineral interest.
An essential resource that elaborates on section 170(h) and imposes more specific requirements for a donation to qualify. These include requirements such as mortgage subordination and the treatment of mineral rights that are discussed at length in our Mineral Development and Land Conservation.. Mineral rights can be a particularly tricky issue, for which we recommend CCLT's
A 2006 law (PL109-280) that redefines who is a “qualified appraiser” and sets higher penalties for abusive appraisals. It also tightens rules for easements on “certified historic structures,” discussed below. These reforms remain in effect even if the enhanced easement incentive (also created by that law) expires. Please see:
- Our Summary of Changes in the 2006 PPA
- Analysis of Changes in the 2006 PPA from Attorney William Hutton
- Analysis of the 2006 PPA from Independent Sector
It’s critically important for land trusts and donors to be aware that the new instructions for Form 8283 impose a requirement for conservation easement donors to attach a supplemental statement answering questions that aren’t reflected on the form. Recent experience suggests that the IRS takes these questions very seriously and a sufficiently detailed "supplemental statement" ought to be 5-10 pages long. IRS officials also emphasize that an address is not an adequate "description of donated property" and have suggested referencing, as an attachment, the entire recorded easement and baseline report.
In late 2006, the IRS issued guidance defining "qualified appraiser" and clarifying that appraisals with respect to returns filed on or before August 17, 2006 did not need to meet the new Pension Protection Act requirements.
This letter confirms that conserved lands need not protect endangered species to qualify as protecting "a relatively natural habitat of fish, wildlife or plants."
Attorney Stephen Small’s article in Tax Notes (2004) reviewing the tax law of conservation easements, particularly related to developer donations, and highlighting abuses that are raising concerns with the IRS.
IRS Scrutiny of Conservation Easement Donations
Inspired by a 2004 Washington Post series, Congress and the IRS have greatly increased their scrutiny of conservation easements in recent years. The Alliance is fighting overzealous easement audits through Congress, the courts, the tax press and direct engagement with IRS leadership, but some mistakes and outright abuses still exist. Our may help you avoid audits in the first place by highlighting IRS concerns and the emerging case law from audits that have gone to court. Also see:
- 2007 IRS letter to Congress highlighting continued concerns
- 2008 private letter ruling analyzing a well-drafted conservation easement
Practical Pointers for Land Trusts Regarding Easement Donations
- Appraisal Rules for Conservation Easements (Word, 169K)
- Baseline Documentation Reports (Word, 177K)
- Contemporaneous Written Acknowledgement (Word, 62K)
- Form 8283 (Word, 58K)
- Special Appraisal Bulletin for Southern Land Trusts and their Easement Donors (Word, 164K)
- (Word, 163K)
- The IRS and Asking for Stewardship Contributions (Word, 67K)
This incentive was just renewed through December 31, 2013, retroactive to January 1, 2012!
By allowing conservation easement donors to deduct up to 50 percent of their income (100 percent for farmers, ranchers and forest landowners) for up to 16 years, the enhanced easement incentive helps modest-income landowners realize a greater tax benefit for their generous donation and has boosted the pace of conservation by about 250,000 acres a year. The enhanced incentive was created in the 2006 Pension Protection Act, extended through 2009 in the , through 2011 by section 723 of , and through 2013 by section 206 of H.R. 8. Unless another extension is enacted, the incentive will expire December 31, 2013, but contributions by that date will continue to carry forward under the enhanced rules. is our top policy priority; subscribe to Land Trust Advocates for the latest updates. The following resources explain how the enhanced incentive works; in addition, the above rules for all easement donations still apply, including the 2006 law creating the incentive, which has not changed in subsequent extensions.
Our Frequently Asked Questions walk you through the qualifications and restrictions related to the easement incentive in great detail. It has been updated to reflect the recent renewal of the enhanced incentive.
Estate taxes can lead to the break-up, sale and development of family-owned farm, ranch and forest lands, even when landowners would prefer to keep these lands intact. Thanks to the Land Trust Alliance's advocacy with Congress, a June 1998 tax bill expanded the estate tax benefits for donated conservation easements. In 2013, Congress provided permanent estate tax relief, setting the unified credit at $5 million per individual, indexed for inflation, with a 40% rate. We’re . Many families can benefit from both estate tax AND income tax benefits of donating a conservation easement.
Reduction in Value
The most broadly applicable estate tax benefit of a conservation easement is the federal recognition that property encumbered by a conservation easement is valued for estate tax purposes as restricted, rather than at its unrestricted value. While this may seem common sense, it's helpful that Section 2055(f) of the Internal Revenue Code explicitly recognizes this to be the case. That section relates to donations by will, but the reduction has also been recognized for existing easements and post-mortem donations. In most cases, the reduction will apply even if the easement was sold or donated by a previous owner, without regard to qualification under section 170(h).
Section 2031(c) of the Internal Revenue Code provides an estate tax exclusion of up to 40 percent of the encumbered value of land (but not improvements) protected by a "qualified conservation easement." That exclusion is capped at $500,000 and is further reduced if the easement reduced the land’s value by less than 30 percent at the time of the contribution. To qualify, an easement must meet all the requirements of a "qualified conservation contribution" under section 170(h). In addition, to be a "qualified conservation easement," it must prohibit all but “de minimis commercial recreational use” and cannot qualify solely for purposes of historic preservation. This benefit is limited to the family of the original easement donor, although it can be taken by each spouse and subsequent generations. Donations by will and post-mortem donations are also eligible, but please note that such donations forego the opportunity for an income tax deduction. In 2013, Congress permanently repealed the geographic limitations (see map) that limited this incentive to about half the country prior to 2001. Other important rules and tax implications apply; for more details, see:
- New for 2012: Article on estate tax changes by attorney Timothy Lindstrom
- Conservation Options for Heirs to Land
- Attorney Rob Levin: “You’re Not Too Late: Post-Mortem Donations of Conservation Easements” Tax Notes, October 30, 2000, p. 661.
- Attorney Timothy Lindstrom: Tax Guide to Conservation Easements
- Attorney Stephen Small: Preserving Family Lands series, especially Book II – More Strategies for the Future
Other Estate Tax Benefits
Section 2032A of the tax code allows for the valuation of family farms at their agricultural value, with or without a conservation easement, but the requirements for taking this election are so complex that it is rarely used. Because both 2032A and 2031(c) are subject to caps, some landowners may benefit from taking both elections.
Some state inheritance or estate taxes also provide for agricultural valuations and at least one, Pennsylvania, provides an additional benefit for land under easement. Farm estate planning is an extremely complicated process; in your area may be able to help identify competent local experts.
In addition to the federal tax incentives for conservation, donors may enjoy additional tax benefits on the state or local level. Our page on provides overview information with the primary aim of inspiring other states to adopt such incentives. may have more current and comprehensive information about your state’s incentives.
Income Tax Credits
The most powerful state incentives for conservation are the transferable tax credits available in Colorado, Georgia, New Mexico, South Carolina and Virginia. Such credits can be sold to an individual or corporation with high tax liability, generating immediate income for the donor. Arkansas, California, Connecticut, Delaware, Iowa, Maryland, Massachusetts, Mississippi and North Carolina offer some form of non-transferable income tax credit. All but Arkansas, Colorado, Maryland and Mississippi apply to some fee-simple land donations as well as conservation easements. New York offers a unique tax credit, not at the time of donation, but every year in an amount equivalent to 25 percent of the property taxes paid on land under easement. .
Property Tax Benefits
It seems common sense that the assessed value of land should be reduced when it is encumbered by a conservation easement, but in practice, the property tax treatment of land under easement varies by state, county, town and sometimes the discretion of individual assessors. We recommend consulting with to discuss conditions in your area and whether an unexpectedly large assessment of land under easement may be grounds for an appeal. One unique property tax benefit is , which provides a 50-100 percent property tax exemption for land under easement.
When designing tax incentives for conservation, the federal government recognized that many properties with high conservation values, including some family farms, are held in a corporate ownership structure. As such, most of the tax benefits for conservation are also available to corporations. The complexities of a corporate ownership structure make it even more important to seek independent tax advice, but here are some general considerations.
S Corporations and Partnerships
S corporations and most partnerships are “pass through entities,” meaning that the tax implications of a charitable contribution by the business “pass through” on a proportional basis to the individual tax returns of its shareholders. Thus, tax deductions are divided proportionally and subject to the AGI limits discussed above. Each shareholder must independently qualify as a “farmer or rancher” to take the 100 percent deduction under the enhanced easement incentive.
Historically, charitable deductions by S corporation shareholders have been limited to their “basis” in company stock – a limitation that has killed many important conservation deals. A little-noticed provision of the 2008 “bailout” package lifted this restriction, allowing most S corporation shareholders to deduct their share of the full fair market value of a contribution made by the company without regard to their “basis.” This provision was recently renewed, but will expire again on December 31, 2013.
- View a discussion of this provision from attorney Stephen Small
- See our fact sheet urging renewal of this provision
C corporations pay taxes as corporate entities, and non-cash charitable deductions are generally limited to 10 percent of their adjusted gross income over no more than six years. The enhanced easement incentive only applies to a C corporation if 50 percent of its gross income comes from “the trade or business of farming” and is not publicly traded, in which case the company could deduct up to 100 percent of its income for up to 16 years -- but once the easement incentive expires December 31, 2013, all C corporations will be limited to 10%. The Land Trust Alliance supports H.R. 3568 and S. 1673, bills championed by the Alaska delegation in the 111th Congress that would automatically allow Alaska Native Corporations to qualify for the 100 percent deduction. View our letter of endorsement.
Donations of preservation easements on certified historic structures (or “façade easements”) may qualify for the same federal income tax benefits available for conservation easements. Past abuses have led Congress and the IRS to apply even greater scrutiny to façade preservation agreements and these transactions should be undertaken only using the most scrupulous and conservative methods with highly reputable preservation entities and other experts.
In 2006, Congress instituted a number of reforms, beyond those applicable to conservation easements, including a requirement to protect the entire exterior of the property and a $500 filing fee. Please see the following resources from the National Trust for Historic Preservation:
- National Trust Easement Resources page
- Summary of Changes Relating to Preservation Easements in the 2006 PPA
- Redlined Compilation of Internal Revenue Code Showing the 2006 Changes
- A Tax Guide to Conservation Easements by C. Timothy Lindstrom
- The Federal Tax Law of Conservation Easements (and 3rd Supplement) by Stephen J. Small
- Preserving Family Lands series, by Stephen J. Small especially Book I – Essential Tax Strategies for the Landowner
- Tax Benefits and Appraisals of Conservation Projects, a Standards and Practices Curriculum text by Larry Kueter and Mark Weston. This book is also available as a full featured course on The Learning Center, free to board, staff and volunteers of member land trusts and partner organizations and to individuals or professional partners joining at the $250 level and above.
- The Conservation Defense Clearinghouse also has more than 175 documents related to conservation tax law. Access requirements are the same as for The Learning Center.