Donations of open-space easements that meet Internal Revenue Code (IRC) 170(h) requirements may entitle the donor to federal income tax deductions. For tax year 2019 and thereafter, the deduction is limited to 50% of adjusted gross income, which if not used up in 2019, may be carried forward at 50% of adjusted gross income for an additional fifteen years or until the donation is fully expended, whichever comes first. In addition, a farmer or rancher who receives in 2019 or thereafter more than 50% of adjusted gross income from the trade or business of farming or ranching is eligible for a tax deduction of 100% of adjusted gross income with the same carry forward right. IRS Form 8283 must be filed to obtain this deduction. Form 8283 requires attachment of a copy of the appraisal, an appraiser’s declaration, VOF’s acknowledgement of the gift, copies of the deed as recorded and the baseline documentation report.
Two recent developments may impact unfavorably federal tax benefits sought by some landowners in donating easements to VOF:
- The Treasury Department has proposed new regulations, applicable retroactively to gifts made on or after August 28, 2018, that will reduce the federal charitable deduction for a conservation or open-space easement by the amount of the land preservation tax credit (40% of the easement value). For example, a landowner gives VOF an open-space easement with a value of $500,000. The state tax credit would be $200,000 and the federal deduction would be reduced from $500,000 to $300,000.
- Certain Tax Court cases raise serious questions as to what restrictions are required for an easement to meet the “granted in perpetuity” requirement of the Internal Revenue Code and allow the federal deduction for the contribution of a conservation or open-space easement. There are conflicting court opinions amongst recent cases, and the issue has not yet been addressed by the Fourth Circuit Court of Appeals covering conservation easements granted in Virginia. See in particular Bosque Canyon Ranch II, L. P. v. Commissioner, 867 F. 3d 547 (5th Cir. 2017) and Pine Mountain Preserve, LLLP v. Commissioner, 151 T. C. 14 (2018).