CONSERVATION EASEMENTS AND TAX BENEFITS

1 CONSERVATION EASEMENTS AND TAX BENEFITSByJessica E. Jay, , Meadowlark DriveEvergreen, CO 80439 Phone: 303-674-3709 Fax: 2010 CONSERVATION LAW, All rights reserved-2- CONSERVATION negative easement in gross with affirmative obligationsenables theowner of theeasementto prohibit or require a limitation upon or an obligation to perform acts on orwith respect to the land owned by the grantor appropriate to the retaining or maintainingof such land ; legally binding agreement that permanently restricts the development andfuture usesof the subject property in order to protect certain CONSERVATION values; property right that is less than fee generated by a non-possessory interest withaffirmative obligations and negative easement implications surrounding a parcelof landand created by a deed conveyance that is executed with the same formalities associatedwith other forms of real estate of CONSERVATION about CONSERVATION of land is given up with CONSERVATION easement; encumbered by a CONSERVATION easement can not be sold, mortgaged,orpassedonto future generations; access generally is required once you grant a CONSERVATION easement.

2 Cannot be sold, or sold and arenotinterests in real property that can be used in tax-free,like-kind Qualification: Income Tax Deduction, Estate Tax Reduction,Estate Tax forIncome Tax Deduction.(Internal Revenue Code 170(h) (26 USC 170)and Treasury Regulations (26 CFR )) 2010 CONSERVATION LAW, All rights qualified CONSERVATION contribution satisfies the Internal Revenue Code requirements fora charitable contribution and income tax deduction. A qualified CONSERVATION contribution is a:a. Qualified real property interest , to a qualified CONSERVATION organization , CONSERVATION purposes . (26 USC 170(h)(1)) qualified real property interest is an easement or other interestin realproperty that under state law has attributes similar to an easement.

3 (26 USC 170(h)(2)) qualified CONSERVATION organization is either qualified, tax-exempt501(c)(3)charitable organization, which mustgenerally be in the land CONSERVATION field or have a mission of landconservation, entity (26 USC 170(h)(3)), theresourcesandcommitmentto protectthe CONSERVATION values ofthe gift in CONSERVATION purposes include the preservation of land foroutdoor recreation or educationforsubstantial and regular use for the public; protection of thenatural habitatof fish, wildlife or plants; preservation ofopen space, including farmland and forestland,where such preservation is for the scenic enjoyment of the general publicor is pursuant to a clearly delineated governmental CONSERVATION policyand will yield a significant public benefit; preservation ofhistorically important landor a certified historicstructure.

4 (26 USC 170(h)(4)) Easement s CONSERVATION purpose(s) must be protected inperpetuity.(26 USC 170(h)(5)). Protected in perpetuity according to the Code and Regulationsrequires several surface miningon the easement property is permitted. 2010 CONSERVATION LAW, All rights general rule is thatno charitable deductionis allowed if thelandownerdoesnot own the mineralsunder the propertyand if atany time there may be a removal of those minerals by any surfacemining exception, however, swallows the general rule, stating that alandowner may obtain a charitable deduction if the probability of extraction or removal of theminerals by any surface miningmethod is so remote as to be negligible.

5 (26 USC 170(h)(5)) factors to be considered in determining if the probabilityof extraction or removal of minerals by surface mining is soremote as to be negligibleinclude:Geological, geophysical oreconomic data showing the absence of mineral reserves on theproperty, or the lack of commercial feasibility at the time ofthe contribution of surface mining the mineral interest.(26 USC 170(h)(5)) 1. K owns 5,000 acres of bottomland hardwood propertyalong a major watershed system in the southern part of the UnitedStates. Agencies within the Department of the Interior havedetermined that southern bottomland hardwoods are a rapidlydiminishing resource and a critical ecosystem in the south becauseof the intense pressure to cut the trees and convert the land toagricultural use.

6 These agencies have further determined (and haveindicated in correspondence with K) that bottomland hardwoodsprovide a superbhabitat for numerous species and play animportant role in controlling floods and purifying rivers. K donatesto a qualified organization his entire interest in this property otherthan his interest in the gas and oil deposits that have beenidentified under K's property. K covenants and can ensure that,although drilling for gas and oil on the property may havesome temporary localized impact on the real property, thedrilling will not interfere with the overall CONSERVATION purposeof the gift, which is to protect the unique bottomland hardwoodecosystem.

7 Accordingly, the donation qualifies for a deductionunder this section.(26 USC 170(h)(5)) must subordinate to theright of the easement holder toenforce the terms of theconservation easement. (26 CFR (g)) by lender does not mean that they will not be able toforeclose on their does mean that in the event of a foreclosure, the conservationeasement will remain ineffectas a restriction on the property. 2010 CONSERVATION LAW, All rights the lender realizes the amount on its security will dependupon the value of the property with the easement in the CONSERVATION easement sufficient to establish thecondition of the property at the time of the gift is required, usually in theform of a baseline inventory.

8 (26 CFR (g)) and proceedsfrom sale or conversion if the easement isterminated. If subsequent unexpected changes in the conditionssurrounding the property subject to easement make impossible orimpractical the continued use of the property for CONSERVATION purposes,the easement may be extinguished by judicial isentitled to proceeds in proportion to the easement s value . (26 CFR (g)) of the easement gift requires a Qualified Appraisal by a Qualified Appraiser to be created and available to submit or submitted with donor s tax return (26 CFR (h)(3)(i), (ii) and 26 CFR ) using theBefore and After Methodof Valuation:Before Valuation Determine Highest and Best Use evaluate potentialfor continuation of existing uses and alternative uses such as subdivision,redevelopment, expansion, renovation, timbering, etc.

9 ;After Valuation Determine Highest and Best Use by comparingeasement restrictions to existing zoning regulations and other appraisal:can becompletedno earlier than 60 days beforeeasement is donated and no later thanfiling oflandowner s tax :Ifthe grant of easementhas the effect of increasing thevalue of any other property owned by the donor or a related person, theamount of the deduction for the CONSERVATION contribution shall be reducedby the amount of the increase in the value of the other property, whetheror not such property is parties:The amount of the deduction in thecase of a charitable contribution of a perpetual CONSERVATION restrictioncovering a portion of the contiguous property owned by a donor and thedonor's family (as defined in section 267(c)(4)) is the difference betweenthe fair market value of the entire contiguous parcel of property before andafter the granting of the basisto reduce his/her tax basis in the land in proportion tothe value of the CONSERVATION easement, so that the CONSERVATION easement valueis proportionate to the value of the land , owner incurs a higher capital gain taxrate when selling the land encumbered by the CONSERVATION easement.

10 (26 (h)(3)(iii) 2010 CONSERVATION LAW, All rights CONSERVATION easement must bedonated, or sold for less than market value (as a bargain sale), to yield a charitable contribution income tax CONSERVATION easement that is granted in return for something, ,where there is a quid pro quo, will not satisfy the donative intent requirement established by case law surrounding the Internal RevenueCode provision for charitable donations and will not qualify for acharitable example is a CONSERVATION easement granted by a landowner to a cityin exchange for or as required by annexation or favorable zoning of Benefitsof Income Tax income tax deductionfor the value of the CONSERVATION income tax purposes.)