14A — April 10 - 23, 2015 — M id A tlantic
Real Estate Journal
www.marejournal.com
A ppraisal
By Linda L. Dietrick, CCIM, Dietrick Group LLC Charitable Giving - A Pandora’s Gift Box
T
demonstrate closeness in time and reasonable probably of the proposed use. For example, Di- etrick Group, LLC appraised a ±115-acre farm located in one of the northern municipalities of Northampton County, Pa. The land was improved with a farm- house and miscellaneous out- buildings on the primary parcel on the north side of a road and vacant low lying flood prone acreage on the minority parcel on the south side of this road- way. None of the buildings were occupied as of the date of inspec- tion. Although the subject was considered a functional working farm, regulatory, governmental and municipal entitlements were approved and recorded for a residential subdivision. At the time of the appraisal, the farm was under agreement of sale to buyers who planned to subdivide the farmhouse and outbuildings on 20 acres and convey the development rights of the residual 95 acres to the County. The sales comparison approach was employed using approved lot sales by builders for the ‘before’ valuation and farmland acreage for the ‘after’ valuation. The before value rendered 35 residential build- ing lots; the after valuation was equal to 95 acres of good soil/ farmland. Based on the highest and best use of the subject’s acre- age for residential develop- ment and with consideration to the influences that affected value, valuation concluded a before value of $2.625 million. Analysis assuming the land encumbered by the easement was performed by comparing easement restrictions to exist- ing zoning regulations and other controls, evaluating the severely limited development potential and concluding con- tinuation of farming as highest and best use in the ‘after’ valu- ation. The loss in value due to the conservation easement was therefore estimated at $1.675 million. As such, we were able to successfully demonstrate clear, substantial unambiguous difference in FMV between the before and after conditions. IRS Scrutiny The IRS will, in appropriate cases, disallow charitable de- ductions for conservation ease- ments and impose penalties and excise taxes. When contemplat- ing the donation of a conserva- tion easement of any type, the appraisal methodology is key to the deduction being allowed by
the IRS, and ultimately by the courts. Professionals involved in these transactions should review recent court cases for situations similar to any dona- tion under consideration. If the before valuation contemplates a development plan, the donor and appraiser must be ready to support the physical and economic feasibility of the plan. Keep in mind that a rule of thumb is that for every income tax court case, there are at least 100 income tax audits. Given the number of tax cases on the deductibility of easements in the last few years, this indicates a high level of scrutiny of these donations. Donors and their professional advisors should be prepared. In conclusion, a charitable contribution for a conservation easement isn’t deductible unless properly substantiated in accordance with the IRC and applicable regulations. Choosing an Appraiser - What to consider The appraisal is the linchpin of IRS’s decision to accept or reject the legitimacy of the easement. Therefore, equally important as the methodology used to value the easement is the choice of appraiser. The appraiser selected should be qualified to make specific judg- ments, not only as to value but also must understand the effects of the conservation easement on property values to make those decisions prop- erly. In the selection process, the appraiser’s education and licensing are paramount. The two basic licenses are Certified Residential Real Property Ap- praiser and Certified General Real Property Appraiser. While the MAI designation is not mandatory, experience with easements for tax purposes is imperative. When evaluating the appraiser’s experience, ask for a resume and a list of two or three references which should include current or previous clients – preferably a client who has made an easement contribution for tax purposes. Linda L. Dietrick is a principal and managing partner at Dietrick Group LLC in Allentown, PA. She is a certified general appraiser in Pennsylvania and New York and author of numerous articles on various appraisal topics, most recently published in Trusts & Estates, a wealth management journal for es- tate-planning professionals. n
hinking about making a charitable contribution of a conservation ease-
of market data isn’t available. Highest and Best Use Highest and best use is prob- ably the single most important appraisal principal and is fundamental when estimating FMV. In specifically determin- ing the FMV value of a conser- vation easement, the appraiser must consider the property’s highest and best use before and after. Aside from method- ology, the highest and best use analysis is considered the most critical portion of the valuation process in a conservation ease- ment appraisal – in fact, most of the time, unless highest and best use is affected, little or no change in value can be demon- strated from the restriction of a conservation easement. The highest and best use analysis is an attempt to iden- tify a property’s most produc- tive use. The analysis begins with a discussion of legally per- mitted uses for the property, primarily taking into consider- ation the zoning ordinance that determines legally permissible uses for the property, as well as any applicable federal laws (for example, a wetlands desig- nation). Other factors include deed restrictions and adjoining uses. Then, from legally per- mitted uses, physically possible uses are considered. These uses are determined from exami- nation of location, access and physical characteristics of the site, such as size, topography and layout. From the uses that are legally permissible and physically possible, financial feasibility is examined. The in- fluence of economic conditions, availability of financing and market demand is examined for each potential use. Finally, the maximally productive or highest and best use of the site selects from the financially fea- sible uses that use producing the highest financial return. The Treasury regulations require one other appraisal ele- ment. If the gift of the easement enhances the value of adjacent property owned by the donor or related parties, the value of the easement is to be reduced by the enhancement. This can occur when a scenic easement is granted that would preclude a future purchaser building near the donor’s property or when the donor would be guaranteed a view of, and access to, a beach. Sometimes the proposed highest and best use is different from the current use. When this is the case, the taxpayer must
Burden of Proof The taxpayer bears the bur- den of proving they are entitled to any claimed deduction and must substantiate the amount of the deduction with a quali- fied appraisal that must be sub- mitted with tax returns. Since each tax situation and property is unique, owners or donors should seek professional coun- sel to clarify legally required or prohibited methodologies and to assist the appraiser in devel- oping a clear knowledge of all of the property’s uses before and after recordation. Those uses must be understood and clearly explained in the appraisal document. Most importantly, the appraisal must comply with all federal requirements and must be able to hold up under the examination and intense scrutiny of the IRS, which criti- cally audits and reviews every case involving a conservation easement. If a conservation easement satisfies the IRC requirements, then the grantor of a conservation easement may receive a charitable income tax deduction. Failure to meet the specific requirements results in disallowing the claimed chari- table contribution. Two Methods Ideally, FMV of a conserva- tion easement is based on the sales prices of comparable easements. Also known as the direct comparison method, the appraiser compares actual sales of easements directly to the easement being appraised. One distinct disadvantage of this approach is finding compa- rable real estate with compara- ble easements. Because there’s no organized market for these easements, it’s very difficult to find comparable real estate for direct comparison. These types of sales are rarely avail- able because they’re typically granted by deed or gift rather than sold. An alternative meth- odology used to establish FMV is called the “before and after” method. In this method, as the name implies, the “before” value of the property is deter- mined without the conserva- tion easement and the “after” value is determined with the real estate as encumbered by the easement. The difference is the value of the easement. The IRS suggests that the value of the easement be based on sales of similar easements whenever possible, however the before and after method is generally acceptable if substantial record
ment for tax purposes? Be- ware of open- ing a Pando- ra’s Box with the Internal Revenue Ser- vice. The IRS is aware that t a x p a y e r s
Linda L. Dietrick
who transfer easements may be improperly claiming chari- table contribution deductions under the Internal Revenue Code Section 170. Under IRC Section 170(h), a taxpayer who makes a qualified conservation contribution is en- titled to a charitable contribu- tion deduction for tax purposes. A qualified conservation contri- bution is considered a donation of a real property interest to a charity exclusively for conser- vation purposes. The property interest donated is generally known as a “conservation ease- ment” and essentially entitles the taxpayer to a charitable contribution deduction equal to the fair market value (FMV) of the easement. “FMV” is de- fined as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” What’s a Conservation Easement? The term “conservation ease- ment” is broadly used to include all essentially similar restric- tions on land use, which include agricultural preservation ease- ments, scenic easements, open space easements and conser- vation restrictions; easements used to preserve the façade and surroundings of historic struc- tures are called historic preser- vation easements. In general, an easement is an interest in real property that transfers use, but not ownership, of a portion of an owner’s property. The Dictionary of Real Estate Appraisal defines a “conserva- tion easement” as a “restriction that limits the future use of a property to preservation, con- servation or wildlife habitat.” These easements are recorded, binding agreements between property owners and either a government agency or an ap- proved non-profit organization for the purpose of preserving in perpetuity a property’s charac- ter or use.
Made with FlippingBook - Online Brochure Maker