Conservation Easement — §170(h)

What is a Conservation Easement?

A conservation easement is a voluntary legal agreement between a landowner and a land trust or government agency that permanently restricts the use of the land to protect its conservation values (scenic, natural, historic, or open space). The landowner donates the easement to the land trust and receives a charitable deduction equal to the fair market value of the donated easement (the difference between the value of the land before and after the easement restriction).

Conservation easements are authorized under §170(h) of the IRC. To qualify for the charitable deduction, the easement must: (1) be donated to a qualified organization (a land trust or government agency); (2) be made exclusively for conservation purposes; (3) be permanent; and (4) be supported by a qualified appraisal.

Deduction Calculation and AGI Limits

The charitable deduction for a conservation easement is equal to the fair market value of the donated easement, as determined by a qualified appraisal. The appraisal must be performed by a qualified appraiser (as defined in §170(f)(11)) and must be attached to the donor's tax return. The deduction is limited to 50% of the donor's adjusted gross income (AGI) in the year of the donation, with a 15-year carryforward for any unused deduction.

For qualified farmers and ranchers (who derive more than 50% of their gross income from farming), the AGI limit is increased to 100% of AGI, with a 15-year carryforward. This makes conservation easements particularly attractive for high-income farmers and ranchers who own large tracts of land.

Syndicated Conservation Easements: IRS Listed Transaction

Syndicated conservation easements (also called conservation easement syndicates or tax shelter easements) are arrangements in which investors purchase interests in a partnership that owns land, the partnership donates a conservation easement on the land, and each investor claims a charitable deduction that is a multiple of their investment (typically 4:1 to 6:1). The IRS has designated syndicated conservation easements as listed transactions (Notice 2017-10), meaning that they are subject to enhanced disclosure requirements and significant penalties.

Practitioners should advise clients to avoid syndicated conservation easements. The IRS has aggressively challenged these transactions, and the Tax Court has consistently disallowed the deductions in cases involving syndicated easements. In addition to the loss of the deduction, investors in syndicated easements face accuracy-related penalties (20% of the underpayment) and, in some cases, civil fraud penalties (75% of the underpayment).

Legitimate Conservation Easements

Legitimate conservation easements (not syndicated) can be a valuable tax planning tool for landowners who own land with significant conservation value (scenic views, wetlands, wildlife habitat, historic structures). The key requirements for a legitimate conservation easement are: (1) the land must have genuine conservation value; (2) the easement must be donated to a reputable land trust with a track record of monitoring and enforcing easements; (3) the appraisal must be performed by a qualified appraiser using appropriate methodology; and (4) the deduction must be supported by contemporaneous written acknowledgment from the land trust.

IRS Enforcement and Disclosure Requirements

The IRS has significantly increased enforcement of conservation easement deductions in recent years. The IRS has established a dedicated Conservation Easement Audit Technique Guide and has trained examiners specifically to audit conservation easement deductions. Practitioners should ensure that all documentation is complete and accurate before claiming a conservation easement deduction. Taxpayers who claim conservation easement deductions of more than $500,000 must attach a qualified appraisal to their return (Form 8283, Section B).

Frequently Asked Questions