By Kenneth H. Bridges, CPA, PFS March 2011
Let’s assume you have a tract of land which could potentially be developed into a residential subdivision, but you don’t want to ever see the land developed, desiring for it to forever remain in its beautiful natural state. If you are willing to grant a perpetual conservation easement to a qualified organization (effectively giving up your rights to develop the property), then the tax law will reward you with a tax deduction. The amount of the deduction is the difference between the appraised value of the land assuming its highest and best use value before the granting of the conservation easement and its value after granting the conservation easement. The IRS perceives that there has been a lot of abuse in this area and has been carefully scrutinizing deductions for conservation easements. However, the taxpayer scored a big win in a recent Tax Court case (Kiva Dunes Conservation v. Commissioner) involving such a donation.
This case involved a developer who granted a perpetual conservation easement, keeping property as a public golf course which otherwise could have been developed as residential lots. The taxpayer claimed a deduction of $30.6 million. The IRS disallowed the deduction entirely, but the Tax Court allowed a deduction of $28.7 million. A few key points from the case:
- The Tax Court appeared to rely heavily on the taxpayer’s appraiser, because such appraiser was apparently more qualified to appraise the property than the IRS’ appraiser and apparently did a more thorough job.
- More than 10 years had lapsed between the time of purchase of the property and the granting of the conservation easement. This helped to avoid any issue with the fact the conservation easement deduction being claimed was many multiples of (52 times) the original purchase price paid.
- The taxpayer had already sold most of the property he owned around the golf course (limiting any value enhancement he was gaining by virtue of granting the conservation easement).
- Both parties agreed that the highest and best use of the golf course property was as residential lots, the property was zoned for such, and the market demand for such at the time was sufficient to absorb the hypothetical number of lots over a reasonable period of time. This might be a harder position to sustain in the current residential real estate market.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.