The value of a conservation easement must be determined by a qualified, independent appraisal. An appraiser considered for the appraisal assignment should demonstrate that they have significant experience performing conservation easement appraisals and meet IRS guidelines and educational requirements. Since the IRS is examining more conservation easement transactions and challenging valuation, the landowner should assume that the IRS may scrutinize the appraisal and therefore the strongest and most defensible appraisal possible is desirable.
The appraiser will use what is referred to as the “Before and After” appraisal methodology. The value of the conservation easement is determined by first determining the “Before” value—the fair market value of the entire contiguous property in the owner’s possession. Generally this is determined by evaluating recent sales of similar types and sizes of property. The “After” value is determined by estimating the value of the same property as if subject to the restrictions of the conservation easement. Again the appraiser relies on sales of similar types of restricted property, to the extent that they exist in the area or region. The difference between the “Before” and “After” values is the value of the conservation easement.
Donors of conservation easements on large properties may do several easements over portions of the property to spread the tax benefits. In these instances, IRS rules state that the appraiser must take into account the “enhancement” that the easement may create on the portion of the property left unencumbered by the easement. For example, if an easement is placed on 800 acres of a 1,000-acre property, the appraiser must determine if there is any enhancement that occurs to the 200 acres left unencumbered. If the easement, by limiting development on the 800 acres, creates higher value on the 200 acres (the unencumbered portion), “enhancement” has occurred and the value of the enhancement must be subtracted from the “Before and After” value to determine the value of the conservation easement. |
