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Saving taxes & the environment.

There is a growing awareness in the United States of the dangers facing the environment from unchecked growth and development. Individuals and communities are attempting to protect and preserve nature through efforts such as recycling and conservation and by blocking zoning changes leading to urbanization. There are, however, other steps taxpayers can take that will not only help save the environment but will save themselves taxes as well.

Charitable Contributions of Real Property

Taxpayers can protect property from being altered by development by donating the property to a conservation organization. Individuals who are concerned about making an outright gift of property that requires them to relinquish all rights to it should consider donating an easement for conservation purposes instead. Both contributions will result in a tax deduction. By donating a conservation easement, however, the owner is allowed to retain ownership of the property but is restricted in what he or she can do with it.

An easement is the right to use someone else's property for a specific purpose. A conservation easement conveys the right to leave the land forever undeveloped. The owner can sell the land or transfer it by gift or inheritance, but the easement will stay with the land. Since the easement restricts what the owner can do to the property, it reduces the property's value. The lost value constitutes the charitable contribution.

To illustrate, assume that 10 years ago a taxpayer paid $20,000 for 20 acres of undeveloped forest across the street from his residence. The property is zoned residential and has been appraised at $250,000. The taxpayer conveys a conservation easement to a qualified charity and, since no buildings can be erected on the property, the land's value drops to $30,000. The conservation easement is worth $220,000 (the reduction in value) and the taxpayer has made a charitable contribution of $220,000. An added bonus is the taxpayer has preserved a piece of property in his own neighborhood.

Qualified Conservation Contributions

A charitable contribution deduction is generally not permitted for any interest in property consisting of less than the donor's entire interest. Code Section 170(f)(3)(b)(iii), however, allows a deduction for the contribution of less than the entire interest if certain requirements are met. Regulation Section 1.170A-14(a) stipulates the contribution must be of a qualified real property interest to a qualified organization for conservation purposes which must be protected forever.

A qualified real property interest can be either a perpetual conservation restriction on the use of the real property or the entire interest in the property other than the mineral interest. A perpetual conservation restriction is an easement granted forever on the use of the property which either: 1. Preserves land for outdoor recreation or the education

of the general public; 2. Protects a natural habitat of fish, wildlife or plants; 3. Preserves open space; or 4. Preserves a historically important land area or a

certified historic structure.(1)

Some examples of donations for conservation purposes include land donated for a nature preserve or hiking trail for use by the general public. A pond that is the feeding area for wildlife could also be donated and would qualify for the deduction even if public access to the natural habitat is restricted. Land can be donated to preserve open space if it is made pursuant to a clearly defined Federal, state or local governmental conservation policy. It can also be contributed for the scenic enjoyment of the general public if it will yield a significant public benefit. Scenic enjoyment is determined by considering all pertinent factors such as relief from urban closeness, compatibility of the land with other land in the area and the degree to which the land use maintains sunlight for other surrounding areas. An example of preserving scenic enjoyment is donating a building restriction on land which, if developed, would ruin the panorama enjoyed from a state park.(2)

Donations of property preserving a historically important land area also qualify for the contribution deduction. Land within a registered historic district or adjacent to property listed in the National Register of Historic Places qualifies for the deduction if the preservation of the land contributes to the historic or cultural integrity of the area. For example, assume the taxpayer owns a building and a vacant lot in a registered historic district. The taxpayer grants a charitable organization an easement on the lot which requires the lot remain vacant and be planted with a garden reflecting the period of the historic district. The lot cost the taxpayer $10,000 and was worth $50,000 prior to granting the easement. Afterwards it is worth $15,000. The taxpayer is entitled to a charitable deduction of $35,000.

Conservation contributions are not limited just to undeveloped land. An easement on a structure listed on the National Register of Historic Places or is certified as being of historic significance can also qualify as a conservation contribution. Easements on structures can include limits on the kinds of changes made to the building or opening the building to the public. Some visual public access to the property is required to qualify, which means that the property must be visible from a public way. If the view of the property is blocked by a fence or wall, for example, the public must have the opportunity to view on a regular basis the features which are preserved by the easement.

To illustrate, suppose a taxpayer owns a home built during the Revolutionary War which has most of its original interior architectural features intact. The owner grants an easement to a qualified organization which allows the organization to open the house to the public during the first Monday of each month. The organization is also permitted to bring study groups through the house by appointment. The reduction in the value of the house due to the easement constitutes a charitable contribution.

To meet the requirements of Code Section 170(h), the donation must be exclusively for conservation purposes. If the donation will achieve one of the conservation purposes but will destroy other significant conservation interests, a deduction will not be allowed.(3) For example, assume property which is adjacent to a state park is zoned residential and can be subdivided into 10 acre parcels. Development of the property would destroy the scenic view from the state park. If the owner donates a scenic easement on the property but retains the right to divide the property into 10 acre parcels and build one house on each parcel, no contribution deduction will be allowed because any building on the property would destroy the scenic view from the park.

Enforceable Restrictions

As noted earlier, the conservation purposes of the easement must be enforceable in perpetuity in order for the donation to be tax deductible. To ensure the restriction is legally enforceable, it should be recorded in the jurisdiction in which the property is located.(4) If the donor reserves any rights which might impair the conservation interests if exercised, the donor must provide the qualifying organization with documentation, such as survey map or aerial photographs, to establish the condition of the property at the time of the contribution. The documentation is intended to protect the conservation interests so that if the rights are exercised later, the organization can take steps to enforce the conservation restriction by legal proceedings and can require the restoration of the property to its condition at the time of the donation.

For example, if a donor contributes land but reserves the right to extract subsurface minerals, he must notify the organization before extracting the minerals in order for the organization to determine if the process will destroy the conservation purpose. If the conservation interest will be harmed, the organization can take steps to stop the extraction. The donee organization is responsible for ensuring the conservation purpose is enforced forever. The organization can transfer the easement but only to another group that qualifies for a conservation contribution and will continue to carry out the original conservation purpose. If conditions surrounding the property change so the continued use of the property for conservation purposes is impossible or impractical, the property can be sold or exchanged. Any proceeds, however, must be used by the organization in a manner consistent with the original conservation purpose of the contribution.(5)

Qualifying Organizations

To be deductible, a conservation contribution must be made to an organization committed to protecting at least one of the conservation purposes discussed earlier. Qualified organizations include governmental units and community chests or foundations which receive a substantial amount of their funds from a governmental unit or the public. Local historic preservation organizations and land trusts or conservancies are qualified organizations. There are over 900 local and regional land trusts in the United States today. Approximately 300 of these trusts were organized in the last six years and about 250 of them are in metropolitan areas.(6)

Valuing the Contribution

A donation of a conservation restriction or easement is valued at its fair market value (FMV) at the time the donation is made. If there are recorded sales of comparable easements, those sales prices can be used to value the donated conservation easement. If there are no sales, which is the more likely situation, the easement is valued at the difference between the FMV of the property before and after the restriction is granted. The highest and best use of the property is used in determining its value. For example, if property is undeveloped but is zoned residential, the value of the residential lots is used to determine the FMV.

If granting the restriction increases the value of any other property owned by the donor or a related party, the contribution must be reduced by the increase in the value of the other property. If the restriction enhances the value of the property, no deduction will be permitted.(7)

To illustrate, assume that a taxpayer owns a house on 20 acres of property and grants a conservation easement on 15 acres behind his house. The property was worth $75,000 before the restriction and $20,000 after the restriction. The value of the conservation restriction is $55,000. If the house and remaining five acres were worth $100,000 before the restriction and $120,000 after the restriction because the land behind the house will remain undeveloped, the charitable deduction would be reduced to $35,000 ($55,000 less the $20,000 increase in value of his residence).

If a taxpayer donates an entire interest in property other than the mineral interests, the donation is valued at the FMV of the property without the mineral interests.

Accounting for the


A taxpayer who takes a deduction for a qualified conservation contribution must keep written records of the contribution which include a receipt from the organization showing the location and description of the property, the FMV of the property before and after the contribution, the method used to determine the FMV and the terms of the restriction.(8) If the deduction exceeds $5000, a qualified appraisal must be obtained and attached to the return.(9)

Taxpayers should be aware there are costs associated with making a conservation contribution - the taxpayer must reduce the adjusted basis of the property retained. The reduction is calculated by multiplying the adjusted basis (AB) of the property retained by the ratio of the FMV of the donated restriction to the total FMV of the property before the restriction was granted {AB Property x (FMV Restriction/FMV Property Before the Restriction) = Reduction}.

For example, assume that a taxpayer owns a home in a registered historic district that cost $100,000. The taxpayer grants a restriction on the facade of the house stating he cannot alter the exterior. Before the restriction was granted, the house was worth $200,000. After the restriction it is worth $185,000. The easement is worth $15,000 ($200,000 - $185,000). The adjusted basis of the house must be reduced by $7,5 00 to $92,500 {$100,000 AB x ($15,000 Restriction/$200,000 FMV) = $7,500 reduction).

Charitable Contribution

Deduction Limits

An individual's charitable contribution deduction is limited, in general, to no more than 50% of his adjusted gross income (AGI) for the year. Contributions of capital gain property, property which if sold would result in a capital gain, are further limited to no more than 30% of the taxpayer's adjusted gross income. Any contribution in excess of the limit can be carried forward for five years and deducted, subject to the same limitations. Taxpayers must plan the timing of contributions carefully, however, since contribution carryovers can be deducted only if some contribution limit remains after a current year's contribution are deducted. Any amount that is carried forward and not deducted within five years is lost.

To illustrate, assume that the taxpayer has adjusted gross income of $100,000 in year 1 and has donated a conservation restriction valued at $45,000. The taxpayer's deduction for the contribution would be limited to $30,000 (30% x $100,000 AGI), and the $15,000 excess would be carried forward. Assume in year 2 that the taxpayer has $40,000 of adjusted gross income. Of the $15,000 carried forward, $12,000 could be deducted (30% x $40,000 AGI) and the $3000 excess would be carried forward to year 3.


Taxpayers who are concerned about protecting the environment from future development should consider donating easements on property they own to qualified conservation organizations. Conservation contributions are an effective way of restricting development, preserving a taxpayer's surroundings and reducing his or her tax liability.


(1) Regulation Section 1.170A-14(d) (2) Regulation Section 1.170A-14(d)(4) (3) Regulation Section 1.170A-14(e) (4) Regulation Section 1.170A-14(g)(1) (5) Regulation Section 1.170A-14(c)(2) (6) Wall Street Journal, May 28, 1991, p. B1. (7) Regulation Section 1.170A-14(h)(3) (8) Regulation Section 1.170A-13(b) (9) Regulation Section 1.170A-13(c)

Hans J. Dykxhoorn, PhD, CPA, is Professor of Accountancy in the Haworth College of Business at Western Michigan University, Kalamazoo, Michigan. He has written and published numerous articles in a number of professional accounting and business journals.

Kathleen E. Sinning, PhD, is Professor of Accountancy in the Haworth College of Business at Western Michigan University, Kalamazoo, Michigan. She is Chairperson-Elect of the International Section of the American Accounting Association and has published articles in a number of professional accounting and business journals.
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Title Annotation:tax planning techniques
Author:Dykxhoorn, Hans J.; Sinning, Kathleen E.
Publication:The National Public Accountant
Date:Jun 1, 1992
Previous Article:A small business environmental primer.
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