Business Management Management Strategies
April 1, 2008
By: Jennifer Popovec, Contributing Writer
Before developers and property owners can even think about tax benefits, they need to be ready to defend their charitable intent to the Internal Revenue Service, especially if they have donated land for a conservation easement.
So many developers are desperate to obtain entitlements in cities and states that are notorious for rigorous zoning that they are trading "green" space for approvals, noted Amy Forbes, a partner in Los Angeles-based global law firm Gibson, Dunn & Crutcher L.L.P. "In places like California where it's hard to get permission to build, a lot of cities are requiring conservation easements. The easement is the enticement to give zoning," Forbes explained.
She pointed out that a tax benefit is not in order in such a situation because the easement was conveyed as part of a business deal. "If it's a requirement, it's not a donation. It's quid pro quo. There are way too many developers who think that they can take a deduction even if they only donated the easement because they were forced to do so," Boston attorney Stephen Small said.
Developers and owners need to be aware that the IRS will scrutinize the value of any donation, added Steve Friedman, a tax partner in Ernst & Young L.L.P.'s Washington, D.C., office. According to Section 170(h) of the IRS tax code, conservation easements allow developers and land owners to take an income-tax deduction based on a simple formula: the difference between the fair market values before and after the easement.
"The principal driver of the deduction is that the value of the property has declined because of the conservation easement, that the unfettered property would have a higher value," Friedman explained. For example, 100 acres might be worth $10.5 million with development rights, but without those rights, the land is worth $5.5 million. Therefore, the value of the landowner’s donation would be $5 million.
By: Jennifer Popovec, Contributing Writer
Before developers and property owners can even think about tax benefits, they need to be ready to defend their charitable intent to the Internal Revenue Service, especially if they have donated land for a conservation easement.
So many developers are desperate to obtain entitlements in cities and states that are notorious for rigorous zoning that they are trading "green" space for approvals, noted Amy Forbes, a partner in Los Angeles-based global law firm Gibson, Dunn & Crutcher L.L.P. "In places like California where it's hard to get permission to build, a lot of cities are requiring conservation easements. The easement is the enticement to give zoning," Forbes explained.
She pointed out that a tax benefit is not in order in such a situation because the easement was conveyed as part of a business deal. "If it's a requirement, it's not a donation. It's quid pro quo. There are way too many developers who think that they can take a deduction even if they only donated the easement because they were forced to do so," Boston attorney Stephen Small said.
Developers and owners need to be aware that the IRS will scrutinize the value of any donation, added Steve Friedman, a tax partner in Ernst & Young L.L.P.'s Washington, D.C., office. According to Section 170(h) of the IRS tax code, conservation easements allow developers and land owners to take an income-tax deduction based on a simple formula: the difference between the fair market values before and after the easement.
"The principal driver of the deduction is that the value of the property has declined because of the conservation easement, that the unfettered property would have a higher value," Friedman explained. For example, 100 acres might be worth $10.5 million with development rights, but without those rights, the land is worth $5.5 million. Therefore, the value of the landowner’s donation would be $5 million.
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