IRS Publication 561 — Determining the Value of Donated Property

Finally, if a potential highest and best use is being considered that would require a change in zoning or other restrictions on the property, you must address whether it is reasonably probable that such a change would be permitted. Granting a conservation easement may increase, rather than reduce, the value of property, and in such a situation no deduction would be allowed.

Example. You own 10 acres of land. Similar land in the area has an FMV of $2,000 an acre. However, land in the general area that is restricted solely to farm use has an FMV of $1,500 an acre. Your county wants to preserve open space and prevent further development in your area.

You grant to the county an enforceable open space easement in perpetuity on 8 of the 10 acres, restricting its use to farmland. The value of this easement is $4,000, determined as follows. FMV of the property before granting easement: $2,000 × 10 acres … $20,000 Minus: FMV of the property after granting easement: $1,500 × 8 acres … $12,000 $2,000 × 2 acres … 4,000 16,000 Value of easement … $4,000 If you later transfer in fee your remaining interest in the 8 acres to another qualified organization, the FMV of your remaining interest is the FMV of the 8 acres reduced by the FMV of the easement granted to the first organization. Disallowance of deductions for certain conservation contributions by partnerships or S corporations. Subject to three exceptions, if you are an ultimate member of a partnership or an S corporation and the amount of the partnership’s or S corporation’s qualified conservation contribution exceeds 2.5 times the sum of each ultimate member’s relevant basis, the contribution is not treated as a qualified conservation contribution and no one may claim a deduction for the contribution (section 170(h)(7) disallowance rule). Thus, your charitable conservation contribution deduction is disallowed. The term “ultimate member” means, with respect to any partnership or S corporation, any partner (that is not itself a partnership or S corporation) or S corporation shareholder that receives a distributive share or pro rata share, directly or indirectly (through one or more upper-tier partnerships or upper -tier S corporations), of a qualified conservation contribution. Relevant basis is, with respect to any ultimate member, the portion of the ultimate member’s modified basis that is allocable to the portion of the real property with respect to which the qualified conservation contribution is made. An upper-tier partnership or upper-tier S corporation is a partnership or S corporation that does not itself make the contribution but instead receives an allocated portion of a qualified conservation contribution from another partnership. The term “allocated portion” simply means a distributive share of a qualified conservation contribution made by a lower-tier partnership.