An IRS appraisal is required when you are donating a conservation easement AND you want to claim a tax deduction (and who doesn’t!).
A Conservation Easement is also known as a partial acquisition. With a conservation easement, you are deeding away some of your development rights in perpetuity. You can never get them back. Two appraisals are required;
- Before and After the Conservation Easement, usually combined into one report.
- The difference (Before minus After) is the value of the Conservation Easement
An IRS appraisal is compatible with USPAP, aka Uniform Standards of Professional Appraisal Practice.
The appraiser must analyze the original purchase when your ancestors first bought the property.
Larger parcel rule – All real estate in the area owned by you and your family must be considered in the appraisal. In this sense, your family includes your spouse, parents and grandparents, children and grandchildren, and your brothers and sisters. Also corporations, partnerships, and trusts you control.
The date of valuation in the appraisal can be no more than 60 days before you convey the conservation easement. The appraisal can be made after conveyance, but must be before you file your taxes.
The tax deduction is the value of the conservation easement and can be taken against 50% of your income for up to sixteen years. Read more here. You’ll file IRS form 8283 with a copy of the appraisal to claim the deduction. This IRS form MUST be signed by the appraiser and by the donee.
IRS Imposed Penalties for Faulty Appraisals
The IRS imposes severe penalties for over-valued appraisals. Both the donor and the appraiser are subject to these penalties. Read more here.
The Pension Act imposes accuracy-related penalties of 20 percent for an underpayment of tax resulting from a “substantial” valuation misstatement, and 40 percent for a “gross” valuation misstatement. A “substantial” valuation misstatement is a value 150 percent or more of the amount determined to be the correct value, and a “gross” valuation misstatement is a value 200 percent or more of the amount determined to be correct.
The Pension Act also eliminates the reasonable cause exception in the case of any “gross” valuation misstatement. This means that the taxpayer may not rely upon an “I thought I received good professional advice” defense. The Pension Act also streamlined the procedural requirements for the Secretary of the Treasury to impose civil penalties or disciplinary action against an appraiser.
All of this means its up to you to hire a competent, experienced, appraiser because its you who pays the penalties (the appraiser pays penalties too!). Remember, you’ve given up some development rights forever and you could pay an IRS penalty if the appraisal is faulty.
When you file your taxes, both the appraiser and the land trust must sign your IRS 8283 form.
