A number of requirements in the tax code on conservation easements make it more difficult for developers than individuals to qualify for substantial income tax benefits. Five qualifications in particular require a closer look:

• Conservation purpose
• Eligible recipient of an easement
• Quid pro quo rule
• Basis allocation rule
• Appraisal requirements
• Tax character

CONSERVATION PURPOSE
To receive an income deduction, the donor must meet a conservation purpose test.
The conservation purpose must fall into at least one of the following categories: the property is to be protected for public outdoor recreation and education, or for protecting significant wildlife, plant life, open space, or historic property. A deduction is not available for building fewer houses on a property than local zoning allows. Nor is a deduction available on a few acres of woods set aside in a neighborhood where the benefits accrue only to the local homeowners. The intent of section 170(h) is to preserve property with significant conservation value that benefits the general public.

ELIGIBLE RECIPIENT
Another aspect of section 170(h) notes that the donation must be to a government agency or public charity such as a land trust. Developers setting up their own charitable organizations may find them classified as private foundations and therefore not eligible recipients of the easements.

QUID PRO QUO RULE
If a developer conveys land or donates an easement in exchange for zoning or development approval on an adjacent parcel, it is not a charitable donation. It is part of a business deal.

BASIS ALLOCATION RULE
The basis allocation rule may further reduce the income tax benefit a developer would receive. When an easement is donated on land, the cost basis of the remainder interest must be reduced by the percentage of donated value. For example: Mr. Bridges owns a 100-acre farm with a cost basis in his land of $100,000. The current market value is $2,000,000 and he donates an easement valued at $1,000,000. Mr. Bridges must reduce his basis by 50% to $50,000.

APPRAISAL AND VALUATION
The value of the donation is determined by the amount of value given up. If a developer places an easement on wetlands that he can’t build on anyway, he has not given away much value. In some markets, houses with large lots are more popular than more dense developments. If a developer puts fewer houses on these lots, he hasn’t given up much value.

Developers are more likely than individual landowners to have the contiguous and enhancement rule apply to their appraisals. These rules are designed to pick up any offsetting gains a landowner accrues on other land he owns.

Let’s say a developer puts an easement on 50 acres of land and subdivides the remaining 100 acres. The appraiser values the whole 150 acres before the easement and the 150 acres after the easement. This picks up the likely increase in value of the adjacent property. This rule applies to property owned by the landowner and related parties such as family members, partners, shareholders, or trust beneficiaries. Appraisals also must include the enhancement in value of non-contiguous property owned by the donor or related parties. The value of the deduction is reduced by any enhanced value of other property owned by the donor.

CAPITAL ASSET or INVENTORY
The charitable deduction rules state that property held for sale to customers in the ordinary course of business is not a capital asset and not eligible for deduction at current market value. Instead, deductions are limited to cost basis. Corporations may deduct 10% of taxable income annually instead of the more favorable 50% rule for individuals donating short-term property, or 30% for individuals donating long-term capital assets.

For more information see:
“Proper – and Improper – Deductions for Conservation Easement Donations, Including Developer Donations” by Stephen Small, Esquire www.pgdc.com/fftc/item/?itemID=244540