If a conservation easement meets the IRS’s eligibility criteria, as specifically defined in IRS Code 170(h), the donation of part or all of a conservation easement’s value may be treated as a charitable contribution that can be used to offset a landowner’s federal tax liability.
To qualify for federal tax benefits under IRS regulations, a “qualified conservation contribution” must be donated to a “qualified conservation organization” for “conservation purposes.” A qualified contribution must be a donation of “land, a perpetual easement or other interest in real property that under state law has attributes similar to an easement.” A qualified conservation organization can either be a charitable organization such as a land trust with a non-profit, 501(c)(3) status or a governmental entity. Conservation purposes include such things as the protection of relatively natural habitat, scenic open space and other open space (which may include the protection of farm, ranch or forest lands if their protection is pursuant to a clearly defined government policy), and historic and cultural sites; and the provision of public educational or recreational opportunities.
The enhanced federal tax incentive for conservation easements was recently made permanent by Congress in 2015. Under the enhanced incentive, landowners are allowed to offset up to 50% of their AGI in the year the gift was made and as needed for up to 15 additional years, or until the value of the charitable contribution was used up. Additionally, under the enhanced incentive, qualifying farmers and ranchers can deduct up to 100% of their AGI in the year the gift was made, and as needed for up to 15 additional years or until the value of the charitable contribution was used up.
In the case of purchased conservation easements, the proceeds from the sale of a conservation easement are treated as taxable capital gains just as the sale of any other kind of real estate. If the conservation easement was purchased below fair market value, the difference between the fair market value and the actual purchase price paid may constitute a charitable contribution that may be used to offset these capital gains.