conservation strategies for today global real estate market pp
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- 1. Conservation Strategies for Todays Global Real Estate Market
James W. Freeman, CPA, MBA&Ricky B. Novak, Esq.
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 partners tax liability or 10% of a corporate partners 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)
10. State Tax Benefits of Conservation
The following states offer state tax credits or incentives for approved conservation of natural resources within its jurisdiction:
The following states are considering the adoption of conservation programs:
11. Maryland 12. Mississippi 13. New Mexico 14. New York 15. North Carolina 16. South Carolina 17. Virginia 18. California* 19. Colorado 20. Connecticut 21. Delaware 22. Idaho 23. Kentucky 24. Massachusetts 25. Minnesota 26. Nebraska 27. West Virginia