This document discusses conservation strategies for real estate, including conservation easements. It defines a conservation easement and outlines the tax benefits of donating a conservation easement to a qualified organization, including a federal income tax deduction up to 30% of adjusted gross income. Several states offer state income tax credits for approved conservation easements. The document provides details on Georgia's conservation tax credit program and considers how conservation easement strategies could be applied through partnerships.
Conservation Strategies For Today Global Real Estate Market Pp[1]
1. Conservation Strategies for Today’s Global Real Estate Market James W. Freeman, CPA, MBA & Ricky B. Novak, Esq.
2. Disclaimer IRS Circular 230 Disclosure: Unless explicitly stated to the contrary, this outline, the presentation to which it relates and any other documents or attachments are not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
3. Natural Resource Conservation in General A conservation easement is a restrictive covenant placed on all or a portion of a property for the purpose of conserving natural resources or restricting the use of such property to certain passive activities. According to the Georgia Uniform Conservation Easement Act, a conservation easement is defined as “a non-possessory interest of a holder in real property imposing limitations or affirmative obligations, the purposes of which include retaining or protecting natural, scenic, or open-space values of real property; assuring its availability for agricultural, forest, recreational, or open-space use; protecting natural resources; maintaining or enhancing air or water quality; or preserving the historical, architectural, archeological, or cultural aspects of real property.”
4. Natural Resource Conservation in General Conservations easements have been widely used for decades and are well recognized by government authorities. The use of conservation strategies have become common among entities such as partnerships, limited liability companies, professional associations and Subchapter S or C corporations seeking to conserve real property, while at the same time achieving favorable tax benefits. In basic form, a land owner maintains ownership of the property while its uses and, therefore, its value is restricted by the easement. When diminution of a property's value occurs as a result of the placement of an easement and such easement is transferred to a “qualified organization,” (such as a Land Trust or governmental agency capable of receiving such transfers) certain tax benefits inure to the benefit of the transferor.
5. Natural Resource Conservation in General Conservation easement values are determined by a certified conservation easement appraiser and are determined based on the highest and best use of a property. The “highest and best use” of a property is defined as the logical, legal, and most probable use that will yield the greatest net income to the land over a sustainable period of time. An analysis of the highest and best use by an appraiser involves the consideration of four separate attributes: physical constraints, legally permitted uses, financial feasible uses, and the maximally productive use. It is imperative that the transaction be carefully documented as prescribed by state and US regulators to ensure the benefits are perfected. CFR § 1.170-14 provides statutory guidance for taxpayers and their advisors planning such transactions.
6. US Tax Benefits of Conservation Pursuant to section IRC §170(a), a taxpayer is entitled to deduct a qualified conservation contribution made within a taxable year. (See also §§ 170(c), 170(f)(3)(B)(iii), 170(h), Hughes v. Commissioner, and TC Memo 2009-94). Generally, per CFR §§ 1.170A-1(a) and 1.170A-1(c)(1), the amount of a charitable contribution is the fair market value of the contributed property at the time it is contributed. Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having a reasonable knowledge of relevant facts (CFR § 1.170A-1(c)(2)).
7. US Tax Benefits of Conservation Where there is no established market for similar conservation easements and no record exists of sales of such easements, the regulations provide that the fair market value of a perpetual conservation restriction is equal to the difference between the fair market value of the property it encumbers before the granting of the restriction and the fair market value of the encumbered property after the granting of the restriction (CFR § 1.170A-14(h)(3)(i)). Additionally, any enhancement in the value of a donor's other property resulting from the easement contribution, or of property owned by certain related persons, reduces the value of the contribution deduction (CFR § 1.170A-14(h)(3)(i)).
8. US Tax Benefits of Conservation Federal Tax benefits are specifically allocated to partners via a Form 1065 Schedule K-1 as a Charitable Contribution to a Qualified Organization, subject to the adjusted gross income and itemized deduction phase out limitations set forth for the tax year of donation. State tax credits are also listed on the K-1. These tax benefits can offset up to 30% (50% for 2009) of an individual partner’s tax liability or 10% of a corporate partner’s tax liability. The federal tax deduction via the charitable contribution can be carried forward for up to 15 years under current law. During 2008 and 2009 the standard 5-year carry forward was extended to 15 years. This extended carry-forward period will likely be renewed for 2010 by the federal government.
9. US Tax Benefits of Conservation Recent Tax Court Cases of Interest: Kiva Dunes Conservation, LLC v. Commissioner (T.C. Memo 2009-145) Virginia Historic Tax Credit Fund 2001, LP et al v. Commissioner (T.C. Memo 2009-295)
28. State Tax Benefits of Conservation Georgia (cont.): The purpose of the conservation tax credit is to increase financial incentives for a willing landowner to donate land or place a permanent conservation easement on property. Taxpayers can claim a credit against their state income tax of up to 25% of the fair market value of the donated property. The credit is limited per tax parcel to $250,000 for individuals, $500,000 per corporation, and up to $1 million (in the aggregate) for partnerships. The amount of the credit used in any one year may not exceed the amount of state income tax otherwise due. Any unused portion of the credit may be carried forward for 10 succeeding tax years.
29. State Tax Benefits of Conservation Georgia (cont.): Under O.C.G.A. § 48-7-29.12, the Georgia Department of Natural Resources (DNR) is responsible for certifying that the donated property meets these conservation purposes and that the property is being donated to a qualified organization. Under the GCTCP, the DNR can only provide certification after the donation has been completed. This means that the donor and recipient must have executed and recorded all appropriate documents for the easement before the DNR makes the final determination on a property’s suitability for certification. As prospective donors want some degree of assurance that their conservation donation will meet the standards for certification before completing the transaction and applying for certification, the DNR will provide a pre-certification letter upon request.
30. Application of Conservation Easement Strategies Mutually beneficial objectives may be realized by an equity contribution to a partnership by a new investor whereby the partnership is looking to execute a conservation easement strategy (both conservation and tax mitigation). These objectives may include a capital contribution to strengthen the partnerships balance sheet or to pay down third-party debt in return for a predetermined interest in the partnership or certain tax benefits derived from the donation of the easement. Well after the admittance of new partners, the partnership may execute the conservation easement strategy. The tax benefits associated with this contribution can be specially allocated amongst the partners based on ownership interest in the year that the contribution takes place.
