Conservation Easements and Capital Gains
From: Conservation Easements: The Federal Tax Rules and Special Considerations Applicable to Syndicated Transactions
By: Bryan Mick, JD, MBA and Bradford Updike, JD, LLM
Mick Law P.C.
The deduction for a charitable contribution of property generally is equal to the fair market value (“FMV”) of the property, but in some cases may be limited to the lesser of FMV or basis. In the case of tangible property, the deduction is limited to the lesser of FMV or basis if the use of the property transferred is unrelated to the charitable purpose of the qualified organization, for example, donation of a piece of art work to a conservation land trust.
If the property is ordinary income property or short-term capital gain property, the deduction generally is limited to basis.2 Property is ordinary income or short-term capital gain property if its sale at FMV on the date of contribution would result in ordinary income or short-term capital gain. An example of ordinary income property is real property (land and anything built on it) held by a real estate dealer/developer, if the donated real property is primarily held for sale to customers in the ordinary course of trade or business. If the property is ordinary income property in the hands of the donor, then the deduction would be limited to basis.
Gain on the disposition of depreciable real property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. Additional depreciation is the amount of the actual depreciation over the depreciation figured using the straight line method. Another example is capital gain property (such as real estate held for investment) held for a year or less.
Example #1: Jefferson contributes a conservation easement on a parcel that he held for 11 months. The conservation easement is short-term capital gain property, and Jefferson’s deduction is limited to the lesser of his basis in the easement or its fair market value. The amount of basis allocable to the conservation easement bears the same ratio to the total basis of the property as the FMV of the conservation easement bears to the FMV of the entire parcel.
Example #2: Mary paid $80,000 for a parcel held for investment, which has a FMV of $100,000. She decides to donate a conservation easement with a FMV of $5,000. If Mary’s parcel is held for less than one year, her deduction for the easement is $4,000 ($5000/$100,000 x $80,000 = $4,000). If Mary held the property for more than a year, her deduction is the easement’s FMV or $5,000.
If property is long-term capital gain property, the deduction generally is not limited to basis and may be as much as FMV.3 Property is long-term capital gain property if its sale at FMV on the date of the contribution would result in long-term capital gain. Long-term capital gain property is property held for more than a year. An example is real estate held for more than a year for investment or a personal residence held for more than a year.
Bryan S. Mick is the President of Mick Law P.C. in Omaha, Nebraska, and a provider of independent due diligence legal services for various broker-dealers and registered investment advisors throughout the country.
Brad Updike joined Mick Law in August 15, 2006, and his areas of practice include securities law, oil and gas, private equity, conservation real estate, DPP due diligence, taxation analysis relating to securitized financing, and securities advertising practices. On a local level, Mr. Updike has also served the legal needs of Omaha-based clients on matters relating to estate planning, private placements, trademark law, and 501(c)(3) non-profit taxation matters.
Bryan Mick, Bradford Updike, Mick Law P.C., SANDLAPPER Securities, LLC, Sandlapper Wealth Management, LLC, and TRIPS are unaffiliated.
1 IRC §170(e)(1)(B)(i)(I).
2 IRC §170(e)(1)(A).
3 IRC §170(e)(1).
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