8109 / Is a gift of a real property interest deductible if the gift is less than the donor’s entire interest?

The IRC permits a deduction for a contribution of certain real property interests even though the gift is less than the donor’s entire interest if the gift is for the preservation of land for recreation or education, the protection of natural habitats, the preservation of open space, or the preservation of historically important land or buildings.¹

If a donor contributes for any of these purposes his entire interest in real property (he may retain the right to subsurface oil, gas, or other minerals), a remainder interest in the property, or a restriction on the use of the property (a conservation easement), he may be entitled to a deduction. The contribution must be made to a qualified organization (a governmental unit and certain charities), and the restriction on use of the property must be protected in perpetuity.² The Tax Court has held that in order to be protected in perpetuity, the deed of gift used to transfer the easement, once properly recorded as required by state law, must not be subordinate to a mortgage holder’s security interest.³ The mortgage subordination requirement applies even if the possibility of defaulting on the mortgage is remote. Failure to satisfy the mortgage subordination requirement at the time of donation will result in a denial of the charitable deduction even if a mortgage subordination agreement is later executed.⁴

A trust may not take a charitable deduction (under IRC Section 642(c)) or a distribution deduction (under IRC Section 661(a)(2)) with respect to a contribution to charity of trust principal that meets the requirements of a qualified conservation contribution (under IRC Section 170(h)).⁵