"Green" charitable contributions.
Sec. 170(h) allows a charitable deduction for contributions of certain partial interests in real property for conservation purposes. To qualify, a donor must meet the following four requirements:
1. The property must be a "qualified real property interest."
2. The property must be donated to a "qualified organization."
3. A donation made for "conservation purposes" must include at least one of the following (under Sec. 170(h)(4)(A)):
* Preservation of land areas for outdoor recreation by, or for the education of, the general public;
* Protection of a relatively natural habitat of fish, wildlife, or plants or similar ecosystem;
* Preservation of open space (including farmland and forest land), when such preservation will yield a significant public benefit and is (1) for the scenic enjoyment of the general public or (2) pursuant to a clearly delineated governmental (e.g., Federal, state or local) conservation policy; or
* Preservation of a historically important land area or a certified historic structure.
4. The contribution must be "exclusively" for conservation purposes. However, Regs. Sec. 1.170A-14(e)(2) states that this does not prohibit certain uses (e.g., selective timber harvesting or selective farming) if, under the circumstances, they do not impair significant conservation interests.
What Is a Conservation Easement?
A conservation easement is a legal agreement between a landowner and a government, public charity or land trust that permanently protects land by limiting the extent and type of development, but leaving the land in private ownership. The conservation easement usually results in a qualified conservation contribution.
The decrease in the fair market value (FMV) of property donated in perpetuity may generate a deductible charitable contribution. When a landowner establishes a conservation easement, he or she may continue to live on the land or work it--in accordance with the easement's provisions--and can sell the land or pass it on to heirs.
Conservation easements offer many options and can be written to define the conservation purpose. An easement that protects a wildlife habitat may bar any development; one protecting agricultural farmland may still allow farming and the building of additional agricultural structures. A conservation easement can apply to just a portion of the property; it does not always have to allow public access.
How a landowner values a contribution depends on the type of qualified real property interest contributed. The most common type is a perpetual conservation restriction. Its value is calculated as the net change, caused by the contribution of the restriction, in the encumbered property's FMV. As comparable sales are rare, the landowner needs an appraisal both before and after the easement restrictions are in place to determine the net change. Generally, the allowable deduction for a conservation easement is the difference between the value of the burdened property before and after the donation. Once the donor gifts the property, be or she must reduce the property's adjusted basis by the adjusted basis allocable to the interest contributed.
An individual donor deducts a qualified conservation contribution on Schedule A, Form 1040. The donor has to attach Form 8283, Noncash Charitable Contributions, to his or her return, with a statement showing the underlying property's FMV before and after the gift, and the conservation purpose furthered by the gift; see Regs. Sec. 1.170A 140). For excess contributions carried over to future years, the donor has to attach a statement to the return identifying the carryover amounts in each percentage limit category.
A landowner can donate or sell easements to land trusts, which are administered by private agencies and cover only certain areas of the U.S. If the land is not a part of the trust's area, the landowner will not be able to contribute to a particular land trust. Work continues among Federal, state and private agencies to establish more land trusts.
Besides donating an easement, a landowner can place land in a land trust in several ways. He or she can donate a remainder interest in the land, which would allow him or her to continue living on the land, with the land trust gaining title and control at the landowner's death. The deductible contribution would be based on the donated property's FMV, less the expected value of the reserved life estate.
Alternatively, the landowner can donate land by will to ensure protection after his or her death. He or she can also establish a charitable gift annuity to receive a life income interest. The income tax deduction would be based on the land's FMV, less the expected annuity payments.
If the landowner is in need of some immediate income, he or she can sell the land to a land trust at a bargain price. The difference between the FMV and the bargain sale price entitles the landowner to a charitable deduction. This also makes the property more affordable for the land trust.
Federal, state and private agencies can structure and establish conservation easements that generate qualified conservation contributions. Agencies accept donations based on their mission and their ability to manage and care for donated property.
The Land Trust Alliance. This private agency (www.lta.org) governs multiple land trusts. It acquires land outright from landowners who want to donate or sell conservation easements. It manages tire land through land trusts. The landowner donates and/or sells land already in designated land trust areas.
The Nature Conservancy (TNC). This private, international agency (www.nature.org) works aggressively with corporate America and individual landowners to protect habitats and promote conservation. It has been responsible for protecting thousands of acres with minimum easement restrictions. For example, TNC has established easements allowing landowners to continue to live on the property, tree cutting, grazing, hunting and other traditional land uses that do not necessarily require public access.
The Natural Resources Conservation Service (NRCS). This Federal agency (www.nrcs.usda.gov) does not accept donated easements; it assists landowners with conservation funding and incentives to meet environmental challenges on their land. Incentives encourage landowners to set aside land for environmental purposes (e.g., grazing, farmland, wetlands or wildlife habitat).
The U.S. Fish and Wildlife Service (USFWS). This Department of Interior agency (www.fws.gov) has been instrumental in structuring and advising landowners on various agencies and programs available to establish easements, even though it does not accept donated easements to manage.
Pending Federal Legislation
Pending legislation would allow individuals who do not itemize to claim a deduction or credit for qualified charitable donations. Both the House (H.R. 1607) and the Senate (S. 476) versions contain a number of other tax incentives that would enhance donations of qualified conservation contributions. The Senate passed its bill by a vote of 95-5. The House Ways and Means Committee is expected to review the bill.
The legislation would also remove the 30%-contribution base limit on qualified conservation contributions of capital gain property contributed by individuals. The contribution would then be subject to the 50%-contribution base limit. It also would allow individuals to carry over contributions that exceed the 50% limit for up to 15 years, rather than the current five years. The proposal is effective for contributions made after the enactments effective date.
FROM KAREN J. KOCH, CPA, LOUISEVILLE, KY
Save on Federal and state taxes
X owns 50 acres of land, valued as follows:
Appraised at fair market development rate: $5,000 per acre = $250,000
Estimated restricted value offer the easement: $2,000 per acre = $100,000
Potential deductible charitable gift: $3,000 per acre = $150,000
X can deduct up to 30% of his adjusted gross income (AGI) each year, for up to six years or until matching the gift's value. For example, if X has annual Federal AGI of $100,000, he can deduct $30,000 a year for the next six years, if his income does not change. The $150,000 deduction would be fully used in the first five years.
State income tax deductions for charitable gifts generally follow the some guidelines as do Federal tax deductions; thus, the potential state tax deduction is else $150,000.