Charitable Contributions of Conservation Easements

Potential for abuse prompts heightened scrutiny.

Charitable contributions of conservation easements allow taxpayers to obtain a federal tax benefit while helping to conserve land for public use or enjoyment or to preserve a historic structure. Through the use of these easements, ownership of land or a historic building is kept in private hands but with restrictions on its use. The easement creates a discounted value for the property that provides a charitable contribution tax deduction and tax savings for the owner of these properties, while the public benefits from the conservation objectives.


Taxpayers can take a charitable deduction for qualified conservation contributions, which are contributions of a qualified real property interest to a qualified organization exclusively for conservation purposes (IRC § 170(h)(1)). A qualified real property interest for this purpose can be the taxpayer’s entire interest in the property, a remainder interest or an easement that restricts the use of the property in perpetuity. Conservation purposes under IRC § 170(h)(4)(A) are (1) preserving land for outdoor recreational use by, or education of, the general public; (2) protecting relatively natural habitats of fish, wildlife or plants; (3) preserving open space (including farmland or forest space) for scenic enjoyment of the general public or under a governmental conservation policy yielding significant public benefit; and (4) preserving a historically important land area or a certified historic structure.


From 2003 through 2007 approximately 3,000 tax returns per year contained a charitable deduction for donation of a qualified conservation contribution. During this time and since, the IRS has continued to scrutinize deductions for contributions of conservation easements, often challenging them on issues including the quality of the appraiser and/or appraisal, the appraisal technique employed, failure to comply with substantiation requirements or protection of the conservation purpose. Tax practitioners need to be aware of the rules and procedures to successfully support these transactions and their tax treatment. They must be able to select a qualified appraiser and assess an appraisal for compliance with procedural and substantiation requirements. Then they must be able to structure and document these transactions appropriately and correctly calculate the deduction.



Congress intended a tax deduction for donation of a conservation easement because property thus encumbered has certain limitations, added costs and loss of market value. In the case of historic easements, donors generally face restrictions and perhaps higher scrutiny by a historic trust or other donee organization for the owners’ use of and improvements to buildings subject to an easement and thus higher costs. Also, if a building is damaged or destroyed, the cost to restore it to its original form is higher than that of a normal building. For these reasons, Congress considered a tax deduction appropriate to offset the added maintenance and insurance costs as well as to compensate for the loss of fair market value of the building. Contributions of land easements usually entail significant use restrictions, diminishing the property’s potential commercial value. Typically, courts have allowed a deduction for 10% to 15% of the value of the property.


However, the IRS has historically held these deductions to have a high potential for abuse and has scrutinized them accordingly. In Notice 2004-41, the IRS announced its intention to disallow improper deductions of contributions of conservation easements and to review “promotions of transactions involving these improper deductions.” The IRS has been especially suspicious of transactions where a historic building is already subject to local ordinances that restrict the owner’s ability to modify the building. For open-space easements, the Service is especially attuned to donations where it considers the resulting public benefit less than significant. Practitioners, appraisers and the qualifying organizations promoting and facilitating these transactions need to be aware of the rules and procedures they must follow to successfully support these transactions.


Historic easements. Congressional interest in preserving our historical architectural heritage led to the Federal Historic Preservation Tax Incentives Program, passed in 1976. This program has allowed owners of historic buildings a means to preserve the architectural integrity of the exterior of historic buildings by giving them the ability to contribute a facade conservation easement to a historic trust. Facade easements are a common form of a historic conservation easement designed to protect and maintain the historic character of a building’s exterior.


By using a facade easement, the owner of the building agrees to never change the exterior of the building and in return receives a charitable contribution deduction equal to the fair market value of the easement. Once the easement is in place, the owner of the building generally must obtain approval from the historic trust to make any changes to the exterior of the building.


The charitable contribution deduction for facade easements is uncommon in occurrence but significant in amount. There were 1,132 claimed facade easement donation deductions in 2005, averaging $271,629 each; and 1,145 in 2006, averaging $231,167 each. In 2007 there were 242, but the average was $918,392. In 2008, there were 1,396, but their average amount dropped to $27,423 (“Individual Noncash Contributions,” IRS Statistics of Income Bulletin, Spring 2008, Summer 2009, Spring 2010 and Winter 2011, Although these façade easement donations accounted for less than 0.05% of the total number of noncash charitable contributions in each of these years, the charitable contribution deduction per return was substantial.


Open-space or natural habitat easements. For contributions of real property easements generally, Congress has emphasized effective protection or preservation consistent with the exempt purpose of the donee organization, including nature conservancies, environmental trusts and state and local governments. Accordingly, the donee should be able to enforce its rights as holder of the easement to protect those purposes (Conference Report, Tax Reduction and Simplification Act, PL 95-30 (1977)). Although the requirements of providing a significant public benefit and furthering a clearly identified governmental conservation policy must be met independently, they may also coincide, for example, by an easement on land fronting a river that a state has declared a valuable resource that should be protected (Treas. Reg. § 1.170A-14(d)(4)(vi)(A)).



Although under section 170(f)(3) donations of partial interests in property are generally nondeductible, section 170(h)(1) allows a charitable contribution deduction for a qualified conservation contribution of a qualified real property interest to a qualified organization that is used exclusively for conservation purposes.


Treas. Reg. § 1.170A-14(b)(2) specifically provides that “a perpetual conservation restriction” is a qualified real property interest. A perpetual conservation restriction is one granted in perpetuity on the use of real property, including “an easement or other interest in real property that under state law has attributes similar to an easement.”


Treas. Reg. § 1.170A-14(c)(1) states that to be an eligible donee, the organization “must be a qualified organization, have a commitment to protect the conservation purposes of the donation, and have the resources to enforce the restrictions.” Organizations included as qualified organizations include governmental units, section 501(c)(3) organizations that meet the public-support test of section 509(a)(2), organizations described in section 170(b)(1)(A)(vi) (those for which individuals may deduct contributions up to 50% of their AGI and that receive a substantial part of their support from a governmental unit or direct or indirect contributions from the general public), and charitable organizations described in section 501(c)(3) that meet the requirements of section 509(a)(3) and are controlled by any of the three types of organizations mentioned previously (supporting organizations). Taking this requirement further, the Pension Protection Act (PPA) of 2006 (PL 109-280) added that, with respect to easements in registered historic districts, the donor and donee must enter into a sworn written agreement certifying that the donee is a qualified organization with a qualifying purpose and that it has the resources to manage and enforce the conservation easement (section 170(h)(4)(B)(ii)).


Where property is subject to a mortgage, the lender must subordinate its interest in the debt to the qualified organization (Treas. Reg. § 1.170A-14(g)). The subordination must protect the easement even in the event that the property is foreclosed upon. This is important, as the Treasury regulations state that the easement must be enforceable in perpetuity, so if foreclosure or some other future event would nullify the easement, then the charitable contribution deduction for the easement will be disallowed.


Special rules for historic easements. The Code and regulations define “conservation purposes” for historic easements as required in IRC § 170(h) to include preservation of a “certified historic structure,” including any building, structure or land area listed in the National Register of Historic Places or any building located in a registered historic district with regard to which it is certified as historically significant by the Department of the Interior (which via the National Park Service administers the National Register) (IRC § 170(h)(4)(C)(ii) and Treas. Reg. § 1.170A-14(d)(5)). The PPA also added Code section 170(f)(14), which requires a qualified conservation contribution deduction to be reduced by the ratio of any section 47 rehabilitation credit claimed within the preceding five years for the same building to the fair market value of the building on the date of the contribution.


The PPA mandated that facade easements covering buildings in registered historic districts must preserve the historical character of the entire exterior of the building and must prohibit “any change in the exterior of the building which is inconsistent with the historical character of such exterior” (section 170(h)(4)(B)(i)(II), as amended by the PPA). In addition, a significant part of the historic exterior must either be visible from a public area or the public be permitted access to see it regularly (Treas. Reg. § 1.170A-14(d)(5)(iv)).


Besides attaching Form 8283, Noncash Charitable Contributions, to their tax return, donors must also attach a qualified appraisal, photographs of the entire exterior of the building and a list of all of the restrictions on the development of the building. For tax deductions greater than $10,000 on an easement for a building in a registered historic district, taxpayers are required to pay a $500 filing fee with the tax return.



Under Treas. Reg. § 1.170A-1(c), the amount of a contribution in property (including conservation easements) is the donated property’s fair market value.


Limitations on deduction. For individuals, the amount of the charitable contribution deduction from the donation of a conservation easement to a qualified organization for 2011 is limited to 50% of the individual’s contribution base (adjusted gross income, computed without regard to any net operating loss carryback), over the amount of all other allowable charitable contributions for that year (100% for contributions of agricultural or livestock production property by qualified farmers or ranchers), with a carryover period of 15 years (section 170(b)(1)(E)). At the end of 2011, this higher limitation amount is scheduled to sunset, and, barring a further extension of the higher limitation to subsequent years, the limitation of 30% of the contribution base and five-year carryforward for capital gain property will apply (section 170(b)(1)(C)).


Partnerships and limited liability companies pass the deduction through to their partners or members. The most significant limitation on the amount of the charitable deduction in this case is whether the property is considered ordinary income property or long-term capital gain property. If the property contributed as a conservation easement is not a capital asset and gives rise to ordinary income, the taxpayer can take a deduction equal to the fair market value (FMV) of the property less any gain that would not have been long-term capital gain if the property had been sold at the time of the conservation easement contribution. If the property is considered a capital asset, the contribution amount generally is the property’s FMV. For C corporations (other than qualified farmers and ranchers), the total charitable contribution deduction is limited to 10% of the corporation’s taxable income (as defined in section 170(b)(2)(C)). Charitable contributions exceeding this 10% limitation can be carried forward for five years.


Valuation issues. The main difficulty with conservation easement deductions and the basis of frequent disputes between the IRS and taxpayers is the method used to determine the fair market value of a conservation easement. The regulations specify it is the fair market value at the time of the contribution (Treas. Reg. § 1.170A-14(h)(3)). The regulations state that “[i]f there is a substantial record of sales of easements comparable to the donated easement … the fair market value of the donated easement is based on the sales prices of such comparable easements.” If there aren’t any comparable easement sales, “the fair market value … is equal to the difference between the fair market value of the property it encumbers before the granting of the restriction and the fair market value of the encumbered property after the granting of the restriction” (the “before-and-after” method).


In Whitehouse Hotel LP v. Commissioner, 131 TC 112 (2008), vacated and remanded, 615 F.3d 321 (5th Cir. 2010), the Tax Court used the comparable sales method to value a historic easement of façade rights and disallowed $6.295 million of the $7.445 million claimed as a charitable contribution by Whitehouse on its 1997 tax return. However, on appeal, the Fifth Circuit Court of Appeals held that the Tax Court erred in not considering the highest and best use of the property. The Fifth Circuit stated that the Tax Court failed to consider that the Whitehouse property, the historic Maison Blanche building in New Orleans’ French Quarter, was to be used for the site of a Ritz-Carlton hotel and was adjoined to a former Kress department store building that the donor also owned, and that conveying the easement caused significant loss in market value for both buildings. The Tax Court was ordered to perform a revaluation.


Appraisal issues. Donating a façade conservation easement requires obtaining an appraisal not more than 60 days before the contribution date and no later than the due date (including extensions) of the return on which the deduction is claimed. The quality of the appraisal is extremely important, and it must meet all of the requirements spelled out in Treas. Reg. § 1.170A-13(c). In Henry R. Lord (TC Memo 2010-196) the Tax Court found that an appraisal was not a qualified appraisal because it failed to state the contribution date, the date the appraisal was performed and the fair market value of the easement contribution on the contribution date. In a number of cases, the Tax Court has questioned valuation assumptions or how they were applied using the before-and-after method (for example, Hilborn, 85 TC 677 (1985); Strasburg, TC Memo 2000-94; and G. Paul Dorsey Jr., TC Memo 1990-242).


Since passage of the PPA, appraisals and appraisers’ qualifications must meet certain requirements and may have a large impact on the perceived quality of the appraisal as well. Section 170(f)(11)(E)(ii) defines a qualified appraiser as one “who has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements.” The appraiser must also regularly perform appraisals for compensation and show proof of education and experience in valuing the type of property subject to the appraisal (sections 170(f)(11)(E)(ii) and (iii)). (For more on qualified appraisals and appraisers, see Treas. Reg. § 1.170A-13(c) and “Life Insurance: What’s It Worth? (And Who Says?)JofA, Jan. 2008, page 32.) Given the significance of the appraisal as to the value of the donation and the ability of the donation to withstand an IRS audit, donors should engage an appraiser who has experience valuing conservation easements and whose appraisals have successfully withstood IRS examination. If the dollar value of the donation is significant, it may be wise to obtain two appraisals.



Conservation easements help allow open-space land, natural habitats, historic structures or other property having important value to society to be preserved while allowing donors to be compensated through a tax deduction in return for property restrictions. The IRS has and will continue to scrutinize these transactions. Tax practitioners, taxpayers, appraisers and historical trusts need to be aware of the law, IRS guidance and recent court rulings to ensure that their clients have obtained adequate and competent support for a donation.





  Taxpayers can benefit from a deduction for a charitable conservation contribution while the public benefits from a resulting preservation of real property including farmland, natural fish and wildlife habitats, and historic sites.


  Congress’ rationale for a tax deduction includes, besides the public benefit of protecting valuable resources, recognition of the additional costs and loss of value that an easement or similar restriction can pose for the property owner. Nonetheless, the IRS has considered such easements to have a high potential for abuse and has scrutinized them, especially those that are promoted for their tax benefits.


  For historic sites, easements commonly require owners to preserve and maintain the historic character of a historic building’s facade or other external features. Other easements for which a qualified conservation contribution can be available protect farmland, forests and other open-space or buffer land for scenic enjoyment or recreation or to serve a governmental policy that significantly benefits the public.


  For a donated easement to be qualified as a conservation contribution, it must be made to a qualified organization that serves the purpose of the donation and is able to enforce the easement’s restrictions. If any mortgage attaches to the property, the lender must subordinate its interest to the qualified organization. Special rules apply to historic easements, including certification of historic structures by the National Register of Historic Places.


  Under a special allowance extended through 2011, a deduction is limited for most individuals by 50% of the contribution base over the amount of all other allowable charitable contributions for the tax year, with a maximum carryforward of 15 years. For years after 2011, the deduction is scheduled to be limited to 30% of the contribution base, under rules applicable to capital gain property, with a five-year carryforward. Deductions by C corporations are limited to 10% of taxable income without regard to net operating loss and capital loss carrybacks, and carryforward is for five years.


  Tax controversies have frequently arisen over the valuation method and its application by taxpayers. Taxpayers also must be able to defend appraisals and appraiser qualifications under requirements heightened by the Pension Protection Act of 2006.


C. Andrew Lafond ( is an assistant professor at the College of New Jersey in Ewing, N.J. Jeffrey J. Schrader ( is a shareholder in Jeffrey J. Schrader, CPA, PC, in Trenton, N.J.


To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at or 919-402-4434.





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