Conservation Easements and Appraisals

Congressional Hearings on Conservation Easements  Joint Committee on Taxation issued proposals in a report January 2005  Senate Finance Committee Hearing on Tax Code Proposals for reforming Conservation Easement tax treatment – June 8, 2005  House Ways and Means Committee Hearing to review the tax deductions on Façade Easements – June 23, 2005

What is the Issue? Concern is that fraud and abuse is occurring with the current tax deduction for conservation easement donations. 1. Overvaluation of the Appraisal 2. Is there an actual conservation value to the property or is it for the benefit of the landowner 3. Enforcement and Monitoring by Land Trusts on the donated lands.

First action IRS issued a revised Form 8283 in December 2005 requiring more information that answers the issues that the Congressional Committees are concerned about.

Revised IRS Form 8283 The new instructions require that conservation easement donors attach to their 8283 a statement that:  Identifies the conservation purposes furthered by your donation,  Shows, if before and after valuation is used, the FMV of the underlying property before and after the gift;  States whether you made the donation in order to get a permit or other approval from a local or other governing authority and whether the donation was required by a contract, and  If you or a related person has any interest in other property nearby, describes that interest.

Revised IRS Form 8283 The new instructions also state: The donee must be a qualified organization as defined in section 170(h)(3) and must have the resources to be able to monitor and enforce the conservation easement... To enable the organization to do this, you [the donor] must give it [the donee organization] documents, such as maps and photographs, that establish the condition of the property at the time of the gift."

Revised IRS Form 8283 If the donation has no material effect on the real property’s FMV, or enhances rather than reduces its FMV, no deduction is allowable. For example, little or no deduction may be allowed if the property’s use is already restricted, such as by zoning or other law or contract, and the donation does not further restrict how the property can be used.

IRS Examination of Appraisals The IRS found in its examination that some appraisals:  are based on unrealistic assumptions about the highest and best use of the land,  are based on an assumption that the entire assets are already in place,  are conducted without regard to current zoning law, or  are conducted pursuant to inadequate professional standards.

Appraising Easements From Form 8283 in line with IRS examination The FMV of a conservation easement cannot be determined by applying a standard percentage to the FMV of the underlying property. The best evidence of the FMV of an easement is the sales price of a comparable easement. If there are no comparable sales, the before and after method may be used.

Appraising Easements For ALL appraisal methods Attach a statement that:  Identifies the conservation purposes furthered by your donation,  Shows, if before and after valuation is used, the FMV of the underlying property before and after the gift,  States whether you made the donation in order to get a permit or other approval from a local or other governing authority and whether the donation was required by a contract  If you or a related person has any interest in other property nearby, describes that interest.