Bar News - May 13, 2011
Real Property Law: Expiring at Year-End: Enhanced Charitable Deduction for a Conservation Easement
By: Thomas N. Masland
Many New Hampshire families cherish the open space, natural resource values and recreational opportunities provided by their properties, whether the land has been in the family for generations, or has been only recently acquired. The property may be actively farmed or forested, it may have frontage on a lake or river, it may provide scenic vistas from roads or highways, but to many, the land is a very special place. The grant of a conservation easement to a land trust, or the local conservation commission, is the legal tool by which the landowner is able to conserve and protect these attributes and iconic qualities in perpetuity.
A well-constructed conservation easement gift may also qualify for a charitable contribution income tax deduction under Internal Revenue Code Section 170(h). New Hampshire landowners and their advisors should be aware of the opportunity for an enhanced charitable contribution income deduction that is available through this year, but expires on December 31, 2011. This provision allows the taxpayer to take a larger deduction, and to carry forward the gift for up to fifteen years, providing a greater benefit to the less wealthy landowner. While this temporary provision has been extended twice since initially enacted as part of the Pension Protection Act in 2006, and while there has been an effort to make the rule permanent, the current political climate in Washington offers no guarantee that this opportunity will be extended, for a year or two, let alone made permanent. Thus, it is important for these landowners to move quickly if they want to accomplish an easement project and qualify for this benefit before the end of the year.
Conservation Easements: An IntroductionA conservation easement deed restricts and limits certain uses on property by conveying certain interests in the real estate to a qualified organization or agency that is legally obligated to enforce the easement terms. The typical conservation easement proscribes commercial and industrial development, to protect the open space and natural resource attributes of the land. Conservation, agricultural, and historic preservation easements are authorized by New Hampshire RSA 477:45-47.
The ownership of land subject to a conservation easement remains private, meaning that the landowner may continue to live on the land (and pay taxes), to sell it, pass it on to heirs, and most often to enjoy economic benefits through well-managed forestry and agricultural uses.
Generally, an income tax deduction for the charitable contribution of real estate is available only if the taxpayer/landowner contributes or transfers his or her entire interest in a parcel of real estate (IRC §170(f)(3)). One exception to this rule is the gift of a conservation easement that meets the qualifications of §170(h) the Code and the related Treasury Regulations. IRC §170(h) allows a charitable contribution deduction for the gift of a qualified conservation contribution, which is defined as the gift of (a) a qualified real property interest to (b) a qualified organization exclusively for (c) conservation purposes. In addition, the gift must be in perpetuity (IRC §170(h)(5)(A).
Treasury Department Regulations 1.170 A-14 define and describe each of these three requirements in detail. A "qualified real property interest" includes a conservation easement as allowed by and defined in RSA 477:45-47, which is granted in perpetuity. It also includes the gift of a remainder interest in the property, while the landowner reserves a life estate. "Conservation purpose" identifies the resources that must be protected by the easement, which include outdoor recreation or educational use for the general public; protection of a relatively natural habitat of fish, wildlife, plants, or similar ecosystem; preservation of open space (including farmland and forestland) where such preservation provides for the scenic enjoyment of the general public or is pursuant to a clearly delineated federal, state or local governmental conservation policy, and which yields a significant public benefit. While an easement must provide a public benefit, it need not require public access to the property to qualify.
A "qualified organization" includes government agencies at all levels, such as a municipality acting through its conservation commission, county conservation district, or state or federal agency. In addition it includes certain tax-exempt non-profit organizations that are dedicated to, and have the capability to provide long-term stewardship of the land. These organizations commonly known as "Land Trusts" operate throughout New Hampshire on a statewide basis, regionally and locally.
The Income Tax RulesA donation (or the gift portion of a bargain sale) of a conservation easement that meets the requirements of IRC 170 (h) qualifies for the charitable deduction. (The value of the easement is determined by a "qualified appraisal" the details of which are beyond the scope of this article.)
The "traditional rule" is that because the gift of a conservation easement is a gift of capital property, the charitable contribution deduction is limited to 30 percent of the taxpayer’s adjusted gross income. (See IRC 170 (b) and Regulations 1.170A-8) Unused amounts may be carried over for a maximum of five years after the year of the gift. Therefore, the taxpayer has up to six years to take advantage of the value of the easement as a tax deduction.
If the landowner has owned the property for less than one year, the charitable contribution deduction is limited to the tax basis and the 50 percent rule applies.
The "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" enacted in December, 2010 reinstated this provision for easements granted in 2010 and those granted through December 31, 2011. After that date, the law will revert to the "traditional" rules set forth above.
The changes to the traditional rules by these incentives:
Raise the maximum deduction a donor can take for donating a conservation easement from 30 percent of their adjusted gross income (AGI) in any year to 50 percent;
Allow qualifying farmers and ranchers to deduct up to 100 percent of their AGI; and
Extends the carry-forward period for a donor to take tax deductions for a voluntary conservation agreement from 5 to 15 years.
There are other technical requirements for the charitable deduction that are beyond the scope of this article. However, we must note that one of the requirements for "perpetuity" is that all mortgages be subordinated to the easement. (See Treas. Reg. Section 1.170A-14(g)(2)) This is because the foreclosure of a superior mortgage would extinguish the easement, and the mere possibility of that occurrence means the gift cannot be assured in perpetuity.
The difference of the availability of enhanced tax treatment can be financially significant. For instance, if a landowner with a $60,000 per year adjusted gross income makes a gift of a conservation easement worth $400,000, under the traditional rules the annual deduction is limited to $18,000, and will terminate after six years. This results in a total deductible amount of $108,000, leaving $292,000 of the gift unused for a charitable deduction. On the other hand, under the current rules, with the 50 percent deduction and the extended carryover, a landowner can take a $30,000 tax deduction each year for thirteen years, and a final $10,000 deduction in the fourteenth year, and the entire $400,000 of the easement gift is utilized, with commensurate tax savings.
It is not too early to get a project under way for a 2011 contribution easement gift. However, within a few months, it may be too late to get the requisite work under way and to complete an easement transaction before the enhanced tax treatment expires at year- end.
|Thomas N. Masland
Thomas N. Masland is a Director and Shareholder of Ransmeier & Spellman and represents landowners and conservation organizations in land conservation transactions. He is also NH state chair of the American College of Trust and Estate Counsel.