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Don’t cave in to IRS on conservation easements

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in Small Business Tax,Small Business Tax Deduction Strategies

Conservation easements, in which landowners can earn tax deductions for preserving their open land, are rife with abuse, the IRS says. That's why the IRS is cracking down on these tax goodies for wealthy landowners. The IRS has already fingered 240 taxpayers for audits relating to this tactic, with another potential 100 donors on the hit list.

In conjunction with IRS efforts, Congress is pushing legislation that would restrict deductions for conservation donations. The proposed reforms focus on valuation methods, improving the appraisal process and monitoring easements. We should know more about the legislation's fate in the next few weeks.

Advice: Don't throw in the towel on conservation easements just because of this crackdown. There's still a time and a place for legitimate donations of conservation easements.

4 ways to qualify for tax breaks

If you own land in a pastoral setting, you can deduct the value of the land by allowing the public to enjoy the landscape or study it. You'd calculate the deduction using special IRS-approved tables.

But here's the real beauty of the deal: The deduction is yours to keep without giving away one square inch of property. You still own the land in its entirety. To qualify for the tax break, the conservation easement must fall into one of the following four categories:

1. Outdoor recreation/education: preservation of the land for outdoor recreation or education that's accessible to the general public. That includes fishing, boating or land set aside for a hiking trail. The public use of the property must be "substantial and regular."

2. Natural habitat: preservation of a relatively natural habitat of fish, wildlife or plants or a similar ecosystem. The donation can include land that's been altered by human activities if the fish, wildlife or plants exist in a relatively natural state. Access by the public may be limited for environmental reasons.

3. Public scenic enjoyment: preservation of open space (including farmland and forest) that is either (a) for the scenic enjoyment of the general public or (b) pursuant to a federal, state or local government conservation policy that will yield a significant public benefit. In this case, physical access to the property isn't required; visual access is sufficient.

4. Historic reasons: preservation of a historically important or a certified historic structure. To deduct this type of contribution, some public access is required.

As you can see, you don't need to put up with visitors trampling your flowers or littering the grounds to earn a conservation easement. By allowing the general public to view the landscape from afar, you can quietly enjoy the tax benefits.

Tip: This is an all-or-nothing deal. The donation must be made "in perpetuity," meaning your heirs won't be able to alter the land or use it for other purposes, nor can any succeeding owners.

Online resources:

Conservation easements

• The Land Trust Alliance, (202) 638-4725, www.lta.org/conserve

• The Nature Conser-vancy, (800) 628-6860, www.nature.org

• The Trust for Public Land (415) 495-4014, www.tpl.org

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