It’s possible to claim a tax deduction for donating an interest in real estate to charity without ever giving up ownership of the property. With a “conservation easement,” a taxpayer essentially agrees to preserve the property in its natural state.
However, as evidenced by a new case, BC Ranch II, LP, No. 16-60068, CA-5, 8/11/17, the gift to charity must be “in perpetuity.” In other words, it must last forever.
The property can’t be developed for other purposes like a golf course or ski lodge.
Specifically, a deduction may be allowed in the following instances:
Protection of natural habitats for fish, wildlife or plants.
Preservation of land for public recreational or educational use.
Preservation of certified historic structures.
Preservation of "open space," for the enjoyment of the public.
Of course, there’s a catch. (Isn’t there always?) Because the donation must be made in perpetuity, the property must essentially remain the way it is. Even the slightest modification could jeopardize the deduction.
In the BC Ranch II case, a limited partnership acquired a ranch in Texas in 2003 and conveyed part of the ranch to a related partnership in 2005. The ranch developers worked with North American Land Trust (NALT) to determine if the ranch would qualify for a deductible conservation easement.
NALT advised them that the ranch would qualify and that one benefit of such an easement would be to permanently protect the nesting areas and habitat of the gold-cheeked warbler, a listed endangered species.
On NALT’s recommendation, the ranch hired consultants on plant ecology and avian biology to provide recommendations for how the property should be developed to ensure compliance with the Endangered Species Act. The consultants completed a report including detailed aerial photographs and topographic maps depicting surveys showing the gold-cheeked warblers’ probable nesting areas.
Both partnerships donated conservation easements to NALT with substantially identical terms. They protected and preserved (1) the habitat for the gold-cheeked warblers and other birds and game, (2) watershed, (3) scenic vistas and (4) mature forest.
The easements “voluntarily, unconditionally, and absolutely” granted NALT, its successors and assigns perpetual easements over the conservation areas,
prohibiting most residential, commercial, industrial and agricultural uses.
The easements could be amended only with NALT’s consent and then only to modify the boundaries of the homesite parcels, but not to increase their areas above five acres. NALT continues to monitor the conservation area and has repeatedly found it to be in good condition and in compliance with the terms of the easements.
The Tax Court agreed with the IRS that the homesite boundary modification provision violated the perpetuity requirement, but now the Fifth District Court has disagreed. The modifications do not allow any change in the exterior boundaries of the easements or in their acreages.
Thus, neither the exterior boundaries nor the total acreage of the instant easements will ever change. Accordingly, the deductions for the conservation easements are allowed.
This case points out the need to stick to the strict letter of the law. If any of your clients are interested in this unique tax break, coordinate conservation easements with the appropriate government agency to ensure that your clients stays within the tax law boundaries.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...