Author: Karin Gross
Are you planning to claim a tax deduction for donating a conservation easement? There are six key documents that must be complete and accurate. If you don’t pay attention to the details and keep the documentation, you could lose the tax deduction.
What IRS Revenue Agents Look at in Deciding Whether to Audit a Return Claiming Charitable Contribution of an Easement
When IRS revenue agents examine a conservation easement deduction, they obtain and carefully review these six documents:
- Appraisal of the conservation easement
- Baseline documentation report
- Contemporaneous written acknowledgment
- Deed of Easement
- IRS Form 8283, Noncash Charitable Contributions, reporting the conservation easement, with supplemental statement
- For easements on mortgaged property, document subordinating loan on the property
The donor must comply with the substantiation requirements under Internal Revenue Code section 170.
- The appraisal of the conservation easement must value the property in accordance with principles stated in the Treasury Regulations and must contain specific information required by those regulations. The appraisal must be prepared and signed by a qualified appraiser, which is a term of art defined in the Internal Revenue Code and in the associated regulations. The appraisal must include the appraiser’s qualifications, appraisal date, statement that it is prepared for income tax purposes, property description, valuation method, and easement value.
- The baseline documentation report (also referred to simply as “the baseline”) is a document with pictures that establishes the condition of the property at the time of the donation, and the landowner and the land trust must sign a statement stating that the baseline accurately represents the property at the time of granting the easement.
- A critical IRS requirement for donors claiming a federal tax deduction is a contemporaneous written acknowledgment stating that the qualified organization (such as a land trust) received the easement. The acknowledgment must state whether or not any goods or services were provided by the land trust and if so, must describe the goods or services and state their value.
- The donor is not required to file contemporaneous written acknowledgment with the IRS but must be able to provide a copy on request. The donor’s deadline for receiving a copy from the land trust is the earlier of the date on which the return reporting the contribution is filed and the due date (including extensions) for filing the return. Take note: donors have lost the deduction because they filed their tax returns before the CWA was provided.
- The Deed of Easement permanently protects land by restricting future land use and must be signed by the donor and the land trust. The restrictions must be legally enforceable by recording the deed in the land records where the property is located (usually with the Register of Deeds).
- The applicable provisions of the Form 8283 must be fully and accurately completed, including a supplemental statement, with required signatures, and filed with the return reporting the contribution. (At a recent tax conference, a prominent practitioner referred to the correct completion of Form 8283 as a death trap.)
- If there is a mortgage on the property, there must be a subordination agreement to ensure that the mortgage holder’s rights are subordinated to the rights of the land trust.
How to Ensure Your Tax Deduction for a Conservation Easement
If you are claiming a tax deduction for donating a conservation easement, your team of advisors may include appraisers, counsel, and accountants. If qualifying for a tax deduction is important to you, it is imperative to use a qualified tax counsel experienced with these issues to review your documents and to ensure that you have fulfilled all the requirements for a tax deduction.