Conservation Easement Appraisals
What is the purpose of an appraisal?
A conservation easement appraisal may have several uses. For charitable contribution purposes, the appraised value of the easement is used to determine the amount of any income tax deduction available. In this case, the appraisal procedure and report must conform to specific IRS standards noted below.
An appraisal may also be important for estate planning or in reviewing value for property tax purposes. Additionally, while the Minnesota Land Trust does not routinely purchase conservation easements, an appraisal may be used to substantiate the purchase price in such a situation.
Is an appraisal required?
An appraisal is not always necessary. However, a landowner is required to obtain a qualified appraisal if the landowner is donating a conservation easement valued over $5,000 and intends to seek a federal charitable income tax deduction for the gift.
A landowner may also need an appraisal to obtain a mortgage subordination, to support a request for a property tax adjustment or to receive payment in exchange for the easement. In other situations, an appraisal may not be necessary.
What is a “qualified appraisal”?
For federal tax purposes and until further guidance is issued, the IRS currently considers a qualified appraisal to be one that complies with the requirements in Treasury Regulations Section 1.170A-13(c) and is conducted by a qualified appraiser in accordance with generally accepted appraisal standards.
What are “generally accepted appraisal standards”?
An appraisal will be treated as having been conducted in accordance with generally accepted appraisal standards if the appraisal is consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice or “USPAP.” These standards can be found on the web site of the Appraisal Foundation, www.appraisalfoundation.org
Who is a “qualified appraiser”?
The IRS defines a qualified appraiser an individual who has:
- Earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary,
- Regularly performs appraisals for which the individual receives compensation, and
- Is licensed or certified by the State of Minnesota for the type of property being appraised.
What should landowners consider in selecting an appraiser?
Landowners should ask a number of questions when considering who should conduct this critical part of the conservation easement process, including:
- Is the appraiser aware of the new regulations and penalties for appraisers?
- Have they had to defend appraisals in front of the IRS?
How does an appraiser estimate value of an easement?
Typically, an appraiser determines the value of an easement by comparing the value of the property without the easement restrictions in place and the value of the property with the restrictions in place. The difference between the two is the value of the easement itself. This procedure is typically known as the “before and after approach.”
As a simple example:
Value of the land before the conservation easement: $500,000
Value of the land after the conservation easement: $275,000
Difference = value of the conservation easement: $225,000
Proportionate value of the conservation easement: 45%
Generally, a more restrictive easement will result in a higher proportionate easement value. But each parcel of land and each set of conservation restrictions are unique. Therefore, no set or average percentage of value can be attributed to the rights relinquished in an easement.
What does an appraiser consider in estimating the value?
An appraiser will look at a variety of factors concerning both the specific property subject to the easement and the surrounding area. Relevant factors will include:
- Location and character of the property,
- Existing zoning regulations and other laws or contracts that affect the property, and
- Development potential and future land use trends.
- The specific restrictions placed on the land
- The specific rights reserved by the landowner
- The existence of contiguous or other property owned by the landowner or the landowner's family and the potential of the easement to enhance the value of the other property.
What information needs to be included in an appraisal?
While the specific format, length, and content of appraisals vary, the IRS requires very specific information for charitable gift appraisals. Click here for more information.
When should the appraisal be completed?
For charitable deduction purposes, the appraisal must be completed no earlier than 60 days before the date of the gift (the date on which the conservation easement is signed and accepted by the Minnesota Land Trust) and no later than the date on which the tax return for that year is due. In some circumstances, an older appraisal can be updated with more current data. For other non-tax purposes, timelines may vary. Conservation easement appraisals are complex and time consuming. As such, landowners should contact an appraiser early in the process as it may take up to 4 to 6 months or more to complete an appraisal.
Is it necessary to be concerned about the integrity of the appraisal?
YES. The IRS views this issue very seriously and may impose substantial penalties on both the landowner and the appraiser for gifts that are overvalued for tax purposes. Congress recently created new thresholds and penalties for donors and appraisers who artificially inflate the value of an easement for tax purposes. Landowners are well advised to choose an appraiser carefully and to work with the appraiser, a tax advisor and the Land Trust throughout the process of completing a conservation easement.
Remember the simple rule: if it looks too good to be true, it probably is.
What are some additional resources?
- IRS Publication 561 Determining the Value of Donated Property
- IRS Notice 2004-41 Charitable Contributions and Conservation Easements
- Pension Protection Act of 2006, Section 1219
- IRS Notice 2006-96 Guidance Regarding Appraisal Requirements for Noncash Charitable Contributions
- Appraising Easements, Third Edition, published by the Land Trust Alliance and the National Trust for Historic Preservation