Daniel Markey


Currently, the Internal Revenue Service (hereinafter I.R.S.) and the federal courts do not offer specific positive authority as to whether large amounts of easement value from donated air rights can be allocated against the capital account of "land" as opposed to a "building" on a given tract of real estate. A lack of authority in this area creates uncertainty in the real estate market. This uncertainty is not only with the payment of federal income, estate, and gift taxes, but it also has a ripple effect with the assessment of local property taxes. Most importantly, if a deal is on the line, uncertainty can mean the difference between saving a landmark or welcoming a new parking lot. This Note will examine what methods of basis allocation are possible under current tax law. Part I of this note will establish modern jurisprudence relating to the concept of air and development rights. Part I will also clarify the current state of federal tax law pertaining to the donation of conservation easements, depreciation of assets, and the allocation of basis after an exchange of property. Part II of this note will analyze the relation between the I.R.C., I.R.S. rulings, case law, air and development rights jurisprudence, and the economic consequences of conservation donations. This note will conclude by asserting that under the I.R.C. and the Treasury Regulations, qualified conservation easements which grant air rights to a third party should, for purposes of the relevant assets, affect an adjustment to the "land" account and not the account of a building, which incidentally shares the same tract of real estate. By deducting the value of a donated easement from the "land" account, a property owner can still utilize a depreciation deduction against the value of the building that lies on the same parcel of real estate as the air or development rights.