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Some donations of conservation easements qualify for a federal income tax deduction; others do not.
Taxpayers who itemize deductions on their federal income tax return may deduct contributions to charities recognized as tax exempt under §501(c)(3) of the Internal Revenue Code. Among these charitable contributions are gifts of land ownership and, subject to compliance with §170(h) of the Code and accompanying regulations (collectively, the “Code”), donations of conservation easements.
The value of the donated easement for purposes of claiming a federal income tax deduction is calculated as the difference between the fair value of the eased property before the easement is granted minus the value of the eased property after the easement is granted. The claimed value must be supported by a qualified appraisal.
This guide is intended as a basic reference tool for landowners and land trusts. Users are cautioned to consult with their tax advisors for up-to-date information about potential tax benefits of easement donations and the application of the Code to their circumstances.
Land trust representatives do not (and ethically cannot) advise donating owners on tax matters. That constraint does not mean land trusts are insensible to the impact that tax benefits may have on the affordability and feasibility of easement contributions. Land trusts try, whenever possible, to work with donating owners (and their tax advisors) to prepare and document an easement qualifying for deductibility under the Code.
This guide references two model documents published by the Pennsylvania Land Trust Association and points to provisions within those models that may support a finding of deductibility. The Model Conservation Easement Donation Agreement addresses typical issues arising in the course of pre-donation easement planning and preparation. The Model Grant of Conservation Easement and Declaration of Covenants (the Model Grant) is the legal instrument that puts the conservation easement in place on the property and provides the terms of long-term management of the easement. These documents or whatever alternative forms are used in an easement transaction are important in documenting deductibility.
The baseline documentation report (BDR), a detailed report of the conservation values of the eased property developed during easement planning and preparation, is a third document important for supporting tax deductibility.
A transfer of the donor’s entire interest in real property to a 501(c)(3) charity is deductible following the same rules as apply to any other charitable contribution. A conservation easement donation is a transfer of a partial interest, which is not deductible but for an exception in §170(h) of the Code for a qualified conservation contribution defined as follows:
A qualified conservation contribution is the contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. The conservation purpose must be protected in perpetuity.
Each element of the definition must be satisfied to qualify for deductibility. The remainder of this guide discusses the elements (identified by bold type) in the order they appear in the definition and offers suggestions on evidentiary support that may help establish that an element is satisfied. Where appropriate, the guide alerts readers to situations that require special attention, although in-depth discussion of these situations is beyond the scope of this guide.
Payments of cash or other property transfers may or may not qualify as contributions. The determination depends on whether the payment or transfer was a voluntary choice of the donor.
The voluntariness issue has come into question in several instances pertaining to conservation easement donations:
Planning, preparing, and documenting an easement contribution takes time and money. The receiving organization and the donating owners must decide who will provide—and pay for—each task before finalizing the easement. They must also determine the amount of cash to be contributed to the land trust to fund long-term stewardship of the easement.
Court decisions have confirmed that so long as donating owners voluntarily chose to enter into a donation agreement with the donee, the existence of a pre-closing commitment does not itself impair the character of the donation as voluntary. The same principle applies to payment of a cash contribution as a condition of easement acceptance.
Contributions made by the donating owners to defray expenses incurred by the land trust during easement planning and preparation do not impair voluntariness.
However, sometimes a transfer of cash from the donating owners to the land trust is a payment rather than a contribution. There is no deductible contribution if the donating owners received services of substantial value from the land trust and the payment from the donating owners to the land trust was a reciprocation for those services (called a quid pro quo).
The Model Conservation Easement Donation Agreement provides the following support for concluding that services performed by or contracted for by the land trust further the easement project and are therefore not a quid pro quo reciprocated by cash contribution:
An easement granted as a condition of compliance with a binding commitment to a third party is not voluntary and, thus, not deductible. The below examples illustrate two circumstances in which an obligation to grant the easement results in non-deductibility:
The Code identifies a “perpetual conservation easement” as one type of qualified real property interest.
To qualify as a perpetual conservation easement:
Title and survey information will disclose whether any ownership interests are outstanding and whether easements or other interests have been granted.
The requirements for a qualified organization look both to the status of the easement holder as of the donation date and to the possibility of a future transfer of the easement to an unqualified organization.
To be considered a qualified organization, the easement recipient must:
The following items (numbered to correspond with the criteria above) may afford support to evidence that the criteria have been met:
Easement purposes define the scope of the easement holder’s rights in the property and are therefore important for many reasons, one of which is qualification for tax deductibility.
To qualify for deductibility for federal income tax purposes, the easement must preserve or protect land for one or more of the conservation purposes summarized below:
The Model Grant and BDR provide the foundation for easement donors and their advisors to evaluate whether the easement meets the conservation purposes test set forth in the Code.
Easements exist only to serve identified purposes. The corollary to that centuries-old rule is that, once an easement no longer serves the purpose for which it was created, courts will, if asked, clean up land titles by declaring the easement null and void. The Model Grant addresses that concern by describing its purposes with sufficient breadth and resiliency to be upheld as useful and beneficial far into the future.
To be deductible for federal tax purposes, the donated easement must be enforceable in perpetuity. The grant must be recorded in the public records. All outstanding mortgages as of the recording date must be subordinated. The grant must provide that, if the easement is extinguished, the easement holder is entitled to a proportionate share of the uneased value of the property.
The text of the Model Grant includes the following support for the perpetuity Code requirement:
Section 1.07 (entitled “Federal Tax Items”) of the Model Grant and the accompanying commentary, in addition to addressing some of the Code requirements for deductibility described above, addresses the requirement for notice (§1.07(d)) and other tax-deduction related matters.
 See “IRS Appraisal Requirements for Gifts of Land and Conservation Easements,” published by the Western Pennsylvania Conservancy and available at ConservationTools.org.
 Treas.Reg. 1.170A-14.
 Several appeals court decisions resolve issues pertaining to the voluntariness of easement donations and accompanying cash contributions: Scheidelman v. Commissioner (US Court of Appeals, 2nd Circuit, 2012); Kaufman v. Commissioner (US Court of Appeals, 1st Circuit, 2015).
 Treas. Reg. §1.170A-14(b)(2).
 The commentary to the Model Grant §3.01(b) discusses issues arising from the existence of outstanding interests.
 In addition to the criteria listed below, if the easement is located within a registered historic district, 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 (Treas. Reg. 170(h)(4)(B)(ii)).
 Treas. Reg. § 1.170A-14(c)(1). Qualified organizations for purposes of conservation easement donations include, among others, §501(c)(3) charitable organizations and governmental units
 For an in-depth analysis and discussion, see the Pennsylvania Land Trust Association’s guide The Nature of the Conservation Easement and the Document Granting It.
 Treas. Reg. §1.170A-14(d).
 Treas.Reg.1.170A-14(g). The Code provides lengthy discussion and numerous examples describing circumstances in which the conservation purposes test has been satisfied (or not). Other sources of guidance are appeals of IRS determinations of non-deductibility for failure to meet the public benefit test or to demonstrate the existence of a relatively natural habitat.
 Treas.Reg. §1.170A-14(g)(6).
 For an in-depth discussion, see the Pennsylvania Land Trust Association’s guide Amending Grants of Conservation Easement: Legal Considerations for Land Trusts. See also the Land Trust Alliance’s guide Amending Conservation Easements: Evolving Practices and Legal Principles (2nd edition).
The Pennsylvania Land Trust Association published this guide with support from the Colcom Foundation, the William Penn Foundation, and the Community Conservation Partnerships Program, Environmental Stewardship Fund, under the administration of the Pennsylvania Department of Conservation and Natural Resources, Bureau of Recreation and Conservation.
Nothing contained in this or any other document available at ConservationTools.org is intended to be relied upon as legal advice or to create an attorney-client relationship. The material presented is generally provided in the context of Pennsylvania law and, depending on the subject, may have more or less applicability elsewhere. There is no guarantee that it is up to date or error free.
© 2018 Pennsylvania Land Trust Association
Text may be excerpted and reproduced with acknowledgement of ConservationTools.org and the Pennsylvania Land Trust Association.