South Carolina Lawyer
SC Lawyer, March 2007, #1.
Conservation Easement Tax Benefits Better Than Ever
South Carolina LawyerMarch 2007Conservation Easement Tax Benefits Better Than EverBy T. Heyward Carter Jr. and F. Patricia ScarboroughRecent federal legislation concerning conservation and historic preservation easements provides increased income tax benefits, prompting a surge of interest among property owners. This article provides a brief overview of current South Carolina and federal conservation easement legislation, with a focus on the recent federal tax law changes.
In layman's terms, a conservation easement is a set of restrictions imposed on real property by the property owner. Stated another way, it is an agreement by which a property owner gives up the right to do certain things with or on his property and gives another party the right to enforce the agreement. Giving a conservation easement does not mean the property owner no longer owns the land, nor does it usually mean that the public has any right to come onto the land.
Internal Revenue Code section 170(h) ("Qualified Conservation Contribution") is the source of the federal income tax deduction allowed for a conservation easement that meets the requirements of that section. The income tax deduction is allowed only for a contribution (in perpetuity) of "a qualified real property interest" "to a qualified organization" "exclusively for conservation purposes." (This article will use the popular term "conservation easement" in place of the more technical statutory term "qualified conservation contribution.")
"Conservation purposes" are specifically defined as falling into one or more of four categories: (i) preservation of land areas for outdoor recreation by, or the education of, the general public; (ii) protection of a relatively natural habitat of fish, wildlife, plants or similar ecosystem; (iii) preservation of open space that will yield a significant public benefit; and (iv) preservation of an historically important land area or a certified historic structure. See I.R.C. § 170(h)(4)(A).
A federal income tax charitable deduction is allowed for the value of a qualifying conservation easement. The value of a conservation easement is generally the difference between the fair market value of real property immediately before being made subject to the easement and immediately after the easement is placed over the property. If the real estate has been owned a year or more, the value of the easement can be taken as a deduction against up to 30 percent of the landowner's taxable income for the year in which the easement is given, and any unused deduction can be carried forward for up to five years.
Other federal tax law provisions that provide benefits for conservation easements are (i) I.R.C. § 2031(c), which, if the requirements of that section are met, allows an additional reduction in value for estate tax purposes of real estate in a decedent's estate if the real estate is subject to a conservation easement, even if that easement is placed on the property after the owner's death, and (ii) I.R.C. § 2055(f), which allows an estate tax charitable deduction for a conservation easement placed over real property in an estate.
The federal Pension Protection Act of 2006, H.R. 4, 109th Cong. (2006), contains a number...