Introduction:  Landowners choosing to preserve their land by donating a qualified conservation easement must get an appraisal to document the value of their donation for tax purposes. The objective of a conservation easement appraisal for federal income tax purposes is to determine the fair market value of the donated easement. IRS regulations require a "qualified appraisal" done by a "qualified appraiser". This should result in a thorough, unbiased review of the value of the property rights being extinguished by the donor as a result of the conservation easement.

Qualified Appraiser:

According to the IRS regulations, a “qualified appraiser” is a person who:

• Holds himself or herself out to the public as an appraiser or performs appraisals on a regular basis;
• Is qualified to make appraisals of the type of property being valued;
• Is not the donor, donee, or a party to the transaction. In addition, the appraiser cannot be an employee of, regularly used by, or related to any of the previously mentioned persons; and
• Understands that an intentionally false or fraudulent overstatement of property value may subject them to a civil penalty.

Qualified Appraisal:

According to the IRS regulations, a “qualified appraisal” must include:

• A property description sufficient to determine that the property appraised is the same as the property on which an easement was donated;
• A summary of the property's physical condition;
• The date of the contribution and the date upon which the property was appraised;
• The terms of any agreement by or on behalf of the donor that relates to the use, disposal, sale or disposition of the property;
• The appraiser’s identity and his relationship to the parties of the transaction;
• The appraiser’s qualifications;
• A statement that the appraisal was prepared for income tax purposes; and,
• The fair market value of the property and the method and basis used for valuation.

Easement Values

While the Eastern Shore Land Conservancy can make no claims regarding the value of a particular donated conservation easement, the value of typical easements on the Middle Eastern Shore range between 25% -50% of the "before" value of land. Values have been as high as 75% (e. g. where high-density zoning exists) and as low as 10% (e. g. where there is little development potential) of the "before" value.

Timing of an Appraisal

An appraisal must occur no earlier than 60 days prior to the date of contribution of the easement and no later the due date of the income tax return on which a deduction for the gift is first claimed or reported.

Cost of an Appraisal

The cost of a conservation easement appraisal on the Eastern Shore generally ranges from $1,500 -$2,500. This cost can obviously be higher or lower depending on the complexity of the project. It is important to note that no part of the fee arrangement for the appraisal can be based on a percentage of the appraised value of the property. The cost of the appraisal and other expenses associated with the donation are deductible expenses.

Enhancement

In addition, the appraiser must take into accounty what is refered to as the "Enhancement Effect." There is the possibility that a conservation easement will have the effect of increasing or "enhancing" the value of adjacent or nearby land due to its proximity to the easement property. The IRS code states that if this effect is apparent on lands that are owned by the donor, or the donor's relatives or associates, then the appraiser should subract the increase in value to these adjacent properties from the value of the donated easement.

Penalties for Overvaluation of a Donation

Be aware that the IRS can attach penalties for the overvaluation of a donation on an income tax return or the undervaluation of land subject to a conservation easement on a gift or estate tax return. The Eastern Shore Land Conservancy recommends using experienced appraisers to reduce the possibility of such penalties.