Builders beware: A recent court case makes it harder to get a conservation easement on real estate that borders historic areas. The U.S. Tax Court recently threw out a tax deduction claimed by a Virginia builder who did not live up to the deal to protect a historic property.
James D. Turner, manager of FAC Co., wanted to develop the 29.3-acre Grist Mill area in Virginia into 60 homes. Because more than half of the land was in a flood-plain, the property was limited to 30 lots. Turner's lawyers argued “limiting the development of the Grist Mill property” helped to preserve the land, justifying the conservation easement. The U.S. Tax Court chief Judge Joel Gerber ruled against him. According to his decision, simply restricting building does not qualify as preserving a “historic structure or historically important land area.”
A conservation easement only allows a tax deduction if the taxpayer donates a portion of land to an approved nonprofit land trust or government agency for the sole purpose of protecting a historically significant land area.
The landmark tax court case involving the Alexandria, Va., housing developer, threw out a tax deduction of over $342,000 from a conservation easement that was claimed in 1999. Gerber ruled that Turner did not receive the easement, because it “did not satisfy the historic preservation requirement” of the tax code. He ordered Turner and his wife to pay over $56,000 in fines.
Small, an attorney and author of several books on easement law, says property owners must show that the donated land will be used for conservation purposes to qualify for the deduction.
Many developers and tax professionals “think they can get tax deductions from putting up fewer houses. But conservation easement is for protecting conservation values,” he says. “Most developers do not understand conservation easements. Clearly, Turner didn't.”
The IRS has started cracking down and enforcing conservation easement laws because of increasing misuse and abuse. According to testimony by Steven T. Miller, the commissioner of tax-exempt and government entities for the IRS, wrongful use of the conservation easement has been an issue for the past two-and-a-half years. Smalls says, “None [of the previous cases] have made it to court, but the IRS and the tax court wanted to make a statement.”
Conservation easements have been an important legal tool to help protect 34 million acres of U.S. land, says Rand Wentworth, president of the Washington, D.C.–based Land Trust Alliance.
Generally, home developers would not use a conservation easement because most do not qualify. If they do, while the tax benefit is a huge plus, the conservation of land, most important, preserves the character of the landmark. Russ Shay, director of public policy at the Land Trust Alliance says, “We certainly encourage those in home building to use them, [but] it is a complex system that takes a lot of time. It's not something that everyone can do.”
Smalls hopes the ruling will be an awakening for housing developers. “I hope people are aware of the decision and pay more attention to what the qualifications are for the conservation easement. I hope the decision will encourage developers to seek out good advice. It should be an eye-opener.”