Conservation Easements – Subordinating Mortgages

There are many tax and social benefits to gifting a conservation easement. Unfortunately, some taxpayers are in too much of a hurry to make the contribution and do not complete all of the steps necessary to receive all of the tax benefits.

The U. S. Tax Court, in Minnick and Lienhart v. Commissioner, T.C. Memo 2012-345, upheld an IRS decision to disallow a qualified conservation contribution deduction for property because the property was subject to a mortgage and that mortgage was not subordinated at the time of the gift. The Tax Court rejected the taxpayers’ argument that a later subordination was good enough to meet the requirements of the regulations.

IRC Sec. 170(f)(3) requires that to deduct a contribution of an interest in property, the taxpayer must transfer his or her entire interest in the property. The IRS makes an exception for a contribution of a qualified real property interest exclusively for conservation purposes, but there are still specific requirements for the contribution to be deductible. One requirement is that an interest in property conveyed must be protected in perpetuity. (Code Sec. 170(h), Reg. § 1.170A-14(b)(2)) See also Historic Preservation Conservation Easements – A Good Tax Shelter? A deduction is not allowed for an interest in property which is subject to a mortgage unless the mortgagee subordinates its rights in the property to the right of the qualified organization to enforce its interest. Without that subordination, the interest transfered is not protected in perpetuity.

See also, Mitchell v. Commissioner, 138 T.C. 16 (2012). The Tax Court rejected the taxpayer’s argument that her intent to subordinate the mortgage, and the actual subordination of the mortgage two years after the gift, was good enough.