Conservation Easements


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Conservation Easements
by Jeff Kauttu

Every corner of the United States is home to important and diverse habitats that deserve to be protected; many hold awe-inspiring natural beauty. What is equally important and just as rare is environmentally important land that also has significant development potential. It is this type of high-value development land that is ideally suited for the consideration of a conservation easement, an important tool used to protect valuable ecological resources for future generations.

The old axiom about land is that there is no more where that came from, which is acutely true when discussing sensitive habitat and wetlands. Once eliminated, it is prohibitively difficult and expensive to return land to its natural state.

It is often the case that sensitive habitats such as wetlands have little value in terms of potential development. They may be too remote or the costs associated with developing them are significantly higher than land a short distance away. For instance, a plot of land that is miles from the nearest town and is home to an endangered salamander has obvious ecological importance but little development potential.

Likewise, land that holds significant development value often has little if any ecological value. This could include a cleared city block in downtown Washington, D.C. that was previously home to a gas station. The potential value in building a mixed-use development is high, and there is little new environmental impact.

Conservation easements are a tool that is most effective when land is identified that has both ecological and development potential. Without the easement, the land would almost certainly be developed, and the environment would almost certainly suffer as a result. This type of land is rare.

When a person, family or partnership of individuals place a conservation easement on a tract of land, they give up the development rights forever. In return, Congress has created incentives in the tax code to encourage more conservation. Without these incentives, land conservation would be restricted to a select few, as the financial repercussions of giving away their development rights forever would prevent most from doing so.

Since conservation easements are forever, appraisers examine what is termed “highest and best use” (HBU) when conducting appraisals on these lands. During a regular real estate transaction, the value of the land is solely the most that one party is willing to pay another party for it. When conserving land forever, the value of the land reflects the fact that development rights are forfeited in perpetuity. And through the incentives created by Congress, the difference between the initial price and the Fair Market Value HBU appraisal is the value of the charitable donation that is tax deductible.


IRS Blinders
Unfortunately, some at the Internal Revenue Service (IRS) do not seem willing to fairly apply this standard and are forcing taxpayers into costly litigation. A recent donation I was involved in provides a perfect example. This property had entitlements for 2,200 high-end residences in a booming market. The owner abandoned the development project and instead placed a conservation easement on the bulk of the property, restricting development to only 15 tracts. The value of the donation was large based on the fundamentals of the project. The IRS vigorously contested the appraisal, a contest which it ultimately lost.

This isn’t the fault of the IRS entirely. In some instances it seems the IRS does not have appraisers on hand with the experience necessary to evaluate the nexus between HBU and environmental value. Too often it appears the default position of the IRS is that large donations are inherently bad and they are willing to put taxpayers through costly litigation to prove they are right.

This line of thought is particularly obvious in coverage of conservation easements that compare a valuation on one tract of land with a seemingly similar tract of land nearby. First, many real estate transactions are not made at fair-market value because the buyer and/or seller did not do all due diligence to establish HBU before and after, and thus can not be considered “knowledgeable” buyers/sellers as the IRS (and others) define fair-market value.

Second, short distances can mean a significant difference in land value. If a piece of land is being considered for development of a mine, for instance, the depth of the mineral, the level of the water table and the haul distance by truck or distance to a rail line could make one tract of land ideally suited for development and another tract of land only a short distance away comparatively worthless.

Conservation easement appraisals involve some of the most sensitive, unique and scarce resources in the nation. The opportunities for large conservation easement donations are equally sensitive, unique and scarce.

The perception that “land is land” and that land well-suited for conservation easements is plentiful leads some to the mis-perception that large donations are a result of over-valuation. My experience is not that that the IRS lacks expertise, it is that their expertise is colored by a bias toward low donation value. It is incumbent on conservation easement donors to explain and demonstrate how each project meets the very specific requirements that set the project apart. It would be helpful if the IRS and Congress would approach these situations with the understanding that that what is being conserved is a precious resource that is being preserved in perpetuity and not a gimmick being used to defraud the government.

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About the Author
Jeff Kauttu is an authority in environmental appraisals with more than 25 years of experience.

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Comments (4)

  1. I am a former GS13 Senior Real Estate Appraiser with the IRS in the specific division charged with assuring compliance on this. I have some background on this specific issue.

    Conservation Easement abuse is one of the biggest targets of IRS. At one point it became a bigger priority than overseas tax avoidance shelters.

    A few corrections are required to the above article to avoid readers, taxpayers and appraisers from being dangerously misled.

    Here is the actual IRS conservation easements powerpoint presentation. Not misapplied or misinterpreted.

    IRS has (had) 60+- Senior Real Estate Appraisers in its Large Business & International Division (LB&I), Valuation and Engineering Filed Services Teams all over the country. That’s in addition to appraisers from the various other IRS divisions. These appraisers represent the top 2%+- of appraisers in the country (based on numerical % derived from all applicants divided by the number of those rated superior qualified and subsequently hired by IRS). Additionally, IRS/LB&I have extensive in the house associated expertise from foresters, economists, attorneys, engineers, land-use planners, etc..

    The Congress of the United States passed the legislation that permits deductions for non-cash charitable donations (that Conservation easements fall under). Treasury Regulations; Internal Revenue Code, Internal Revenue Rules and both Tax Court and U.S. Supreme Court decisions all govern the specific circumstance under which conservation easement deductions may be taken.

    Starting about 2010-2011 LB&I was specifically tasked with reviewing all appraisals used in support of deductions for conservation easements due to extreme abuses all over the United States resulting in spurious over-valuations.

    One does not have to like the rules, BUT they are the specific implementation of Congress’ will in this matter. The author does not get to pick and choose his definitions of Fair Market Value which are the only value definitions allowed for these (contained in Treasury Regs). Readers may also read all IRS value definitions at .

    Related to conservation are facade easements. A tab under the conservation easement tab at the above website discusses these. They are a specialized type of conservation easement.

    There is no excuse or reason for the overvaluation of a conservation easement. It is an appraisal competency issue. A hint is to assure that the IRS definition of HBU being used one that is deemed ‘imminently probable’ as opposed to some more traditional definitions of ‘reasonably possible.’

    One aspect of IRS conservation easement valuation I never personally agreed with is the inclusion of ALL contiguous parcels under the same FAMILY ownership in the before and after valuation scenarios rather than only considering the affected parcels owned by the donor. This requirement may support the contention that IRS values may be skewed low. Larger or greater numbers of units of comparison typically yield lower indicated values for the individual units of comparisons.

    For example, if a taxpayer owns 100 acres (with the immediate family owning a surrounding 800 contiguous acres, the ‘before the calculation is 900 acres. If the taxpayer intended to donate 25 of them, the IRS will require the ‘after’ calculation to be 875. This produces lower prices per acre than the 100 minus 25 would.

    I don’t have to agree with IRS to recognize the methodology are ruled as the requirement under the Treasury Regulation that allows a taxpayer to take a donation for donated property. Just like completing a Form 8283 is.

    The author seeks to reinterpret U.S. Code and Treasury Regulations which are actually pretty simple. What was the value of the total property affected before the donation and then what was the value of the remaining property after the donation? The difference is considered to be the value of the conservation easement.

    Appraisers can seek to redefine values and HBU all they want. They can discuss philosophical hypotheticals all-day long. Its good mental exercise but it does not result in compliance BY THE TAXPAYER within the limitations in tax code that permit deductions on THEIR taxes.

    Typically the taxpayer doesn’t learn that their deduction was disapplowed until 2 or 3 years after the fact. By then huge penalties and interest has accrued.

    Appraisers that ‘miss’ the supported FMV by 40% or more WILL be turned in to the Office of Professional Responsibility, be subject to huge fines and may have to deal with the Department of Justice. It’s surprising how many are off by much more than 40%. Being off by as little as 10% may still subject the appraiser to litigation recourse from the taxpayer that just got hit with huge penalties.

    Conservation easement appraisals (or facade easement or air space easement) are not assignments for the faint-hearted or inexperienced. Unless the guiding “special Requriements” of IRS are followed meticulously, even seasoned top appraisers can run afoul of the rules. Future liability can be extreme.

    The largest case I’m personally aware of was a disallowed $750,000,000 (PLUS penalties and interest). Much more than my E&O covers.

    - Reply
  2. I am thinking that the IRS is jaded by decades of scam CE’s, specifically tailored by land planners and appraisers. The IRS is reacting negatively to what has been a system that is particularly ripe for abuse.

    - Reply

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