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nest The Conservation Easement
Personal Finance Advisor by Deloitte & Touche OnLine

Sept. 28, 1998

A tax break is available for donating property for conservation.

A contribution of real property to a charitable organization for a conservation purpose ("qualified conservation easement") is eligible for a charitable deduction for federal estate, gift, or income tax purposes. The Taxpayer Relief Act of 1997 provided an additional exclusion from estate assets for real property subject to a conservation easement, if the date of the donor’s death is after Dec. 31, 1997.

A qualified conservation easement is a contribution of a "qualified real property interest" to a "qualified organization" solely for conservation purposes. The easement can be created during the donor’s lifetime, or upon the death of the donor. A qualified real property interest can be:

  1. The donor’s entire interest in real property (other than a qualified mineral interest),
  2. A remainder interest in real property, or
  3. A perpetual conservation restriction on the use of real property.

A qualified organization is a charity that (1) is committed to, and has the ability to, protect the conservation purpose of the donation, and/or (2) is organized primarily for a conservation purpose. Examples of a conservation purpose include:

  • Preservation of farmland, forests, or open spaces for the pubslic’s scenic enjoyment, or for educational or recreational uses.
  • Protection of natural habitats (for example, plants, wildlife, fish).

Charitable Contribution Deduction: The charitable deduction is based on the difference between the fair market value (FMV) of the real property before the conservation easement, and the FMV after the easement is attached. The value of the property before the conservation easement should consider the property’s "highest and best use" (for example, subdivision of the land). In determining the amount of the charitable deduction (as well as the estate exclusion; see below), the FMV of the property is reduced by any debt that is secured by the property.

Estate Exclusion: Beginning in 1998, there is a $100,000 maximum exclusion for estate tax purposes for a qualified conservation easement, provided at least 30% of the FMV of the property is contributed. If the value of the easement is less than 30% of the FMV, the maximum exclusion is phased out. If the value of the easement is 10% (or less) of the FMV of the property, the estate exclusion equals zero. The maximum exclusion increases $100,000 per year between 1999 and 2002 (that is, maximum exclusion will be $500,000 in 2002).

Upon the death of the donor, the FMV of the property with the conservation easement is multiplied by 40% to determine the estate exclusion amount. After Dec. 31, 1997, an executor of a decedent’s estate has until the due date of the estate tax return (including extensions) to elect to use the conservation easement exclusion.

The following table illustrates the maximum estate exclusion, and the potential federal estate tax savings.
 
Year of
Contribution		 FMV of Property
With a Conservation
Easement		 Maximum Exclusion
(40% of FMV)		 Estate Tax Savings
(55% tax rate)
1998 $250,000 $100,000 $55,000
1999 $500,000 $200,000 $110,000
2000 $750,000 $300,000 $165,000
2001 $1,000,000 $400,000 $220,000
2002 and
thereafter		 $1,250,000
 $500,000
 $275,000

To qualify for the estate exclusion, the property must be located (1) within 25 miles of a metropolitan area (as defined by the Office of Management and Budget), national park, or wilderness area, or (2) within 10 miles of an urban national forest (as defined by the U.S. Forest Service). Additionally, the donor (or a member of his/her family) must have owned the property for at least three years prior to the date of the donor’s death.

Example: A taxpayer owns a home and land with a FMV of $1 million as of Sept. 30, 1998. On this date, the taxpayer places an irrevocable perpetual conservation easement on a portion of the land. Immediately after the conservation easement is in place, the FMV of the property (home and land) is $500,000. Upon the taxpayer’s death in 2003, the FMV of the land with the conservation easement is $1.25 million, and the FMV of the property (home and land) without the easement is $2s million. For income tax purposes, the taxpayer is entitled to a $500,000 charitable contribution deduction in calendar year 1998 (subject to AGI limitations, csarryover allowed)-pre-contribution FMV of $1 million less $500,000 post-contribution FMV. The income tax savings will total $198,000, assuming a 39.6% federal tax rate.

For estate tax purposes, the taxpayer’s estate will be entitled to a $500,000 exclusion (estate tax savings of $275,000, assuming a 55% estate tax rate).

Value of land with easement
at date of donor’s death    
$1,250,000
Exclusion percentage 40%
Estate tax exclusion $ 500,000
Assumed estatee tax rate 55%
Estate tax savings $ 275,000


To provide reliable support for the charitable contribution deduction and the estate exclusion, written appraisals should be obtained from an experienced, qualified appraiser. The appraisal should indicate the FMV of the property both before and after the conservation easement is attached to the property. Also, an appraisal should be conducted as of the date of the donor’s death.

These are some thoughts to consider about conservation easements. Before any action is taken, consult your tax and financial advisors.


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