A conservation easement is a legal agreement between a land owner and a qualified land protection organization to permanently limit the use of land to achieve one or more qualifying conservation purposes.
Under Internal Revenue Code (IRC) Section 170(h)(4), eligible qualifying conservation purposes include:
- The preservation of land areas for outdoor recreation by, or the education of, the general public;
- The protection of a relatively natural habitat of fish, wildlife, plants, or similar ecosystem;
- The preservation of open space where such preservation is for the scenic enjoyment of the general public or pursuant to a clearly delineated Federal, State, or local governmental conservation policy, and it will yield significant public benefit;
- The preservation of a historically important land area or a certified historic structure.
A U.S. individual taxpayer is generally entitled to an itemized deduction for charitable contributions made during the tax year. A taxpayer may be entitled to a charitable contribution deduction for the value of the qualified conservation easement. In general, the value of the easement donation is the difference between the FMV of the property before and after the easement takes effect.1
The deduction is generally limited to 50% of the taxpayer’s adjusted gross income (AGI) for the current tax year. If the current deduction for the conservation easement is limited, the taxpayer can carry forward the unused amounts for 15 years.2
Example of Qualified Contribution and Deduction
Jane Doe owns a 150-acre plot of land in a remote part of Wyoming that borders a state park. The FMV of the property is $12,000,000.
In 2023, Jane donates an easement to use and maintain the land to a qualifying organization for conservation purposes. Jane obtained a qualified appraisal, and the FMV of the property after the easement was $7,200,000. Therefore, the value of the easement and the amount eligible for a deduction under Section 170(f) is $4,800,000 ($12,000,000 minus $7,200,000).
Jane’s AGI for 2023 is $1,250,000. Jane has no other charitable donations other than the conservation easement. Jane’s charitable deduction for the conservation easement is limited to $625,000 (50% times $1,250,000) for 2023. Jane adds the $625,000 to her itemized deductions on Schedule A (Itemized Deductions), and reports the donation on Form 8283 (Noncash Charitable Contributions). Jane can carry forward the unused charitable deduction of $4,175,000 ($4,800,000 minus $625,000) for up to 15 years.
Misuse of Conservation Easements
The IRS has seen a surge in charitable deductions for qualified conservation easements. However, many taxpayers incorrectly claim inflated values for the easements or claim a charitable deduction when they are not entitled to one. The IRS is aware of these abuses and auditing taxpayers’ claims for these donations.