IRS Form 706 (Schedule U) - Qualified Conservation Easement Exclusion

IRS Form 706 (Schedule U) – Landowners, farmers, ranchers, and families with significant real estate holdings can achieve substantial federal estate tax savings through a qualified conservation easement. Executors claim this benefit using IRS Form 706 Schedule U (Qualified Conservation Easement Exclusion).

This comprehensive guide explains what Schedule U is, eligibility rules, how to calculate the exclusion under IRC Section 2031(c), step-by-step filing instructions, required documentation, and practical tips. All information draws from official IRS sources, including the August 2025 revision of Schedule U and the September 2025 Instructions for Form 706 (applicable to decedents dying in 2025 and later).

Always verify the latest forms and instructions on IRS.gov, as tax laws and amounts can change. This article is for informational purposes only and is not tax or legal advice—consult a qualified estate planning attorney, tax professional, or appraiser.

What Is a Qualified Conservation Easement?

A qualified conservation easement is a voluntary, perpetual legal agreement that restricts certain uses of real property (typically land) to protect its conservation values. The easement is granted to a qualified organization, such as a land trust or government agency, and must serve one or more conservation purposes under IRC Section 170(h):

Preservation of land for public outdoor recreation or education.
Protection of natural habitats for fish, wildlife, plants, or ecosystems.
Preservation of open space (including farmland and forestland) for scenic enjoyment or under a clearly delineated federal, state, or local governmental conservation policy that yields a significant public benefit.
Preservation of historically important land areas or certified historic structures (with limitations for the estate exclusion).

The easement must be perpetual, enforceable, and generally prohibit more than de minimis commercial recreational use. It reduces the property’s fair market value (FMV) by extinguishing or limiting development rights while allowing continued compatible uses like agriculture, forestry, or limited residential development.

Visual example of protected land:

What Is IRS Form 706 Schedule U?

Schedule U (Form 706) allows the executor to elect and compute an exclusion from the gross estate for the value of land subject to a qualified conservation easement. Filing Schedule U and claiming the exclusion deems the executor to have made the election under Section 2031(c)(6).

The exclusion reduces the taxable value of the estate, potentially lowering or eliminating federal estate tax liability. For decedents dying in 2025, the basic exclusion amount is $13,990,000 (inflation-adjusted annually). The conservation easement exclusion provides an additional targeted benefit for qualifying land.

Screenshot/example of Schedule U (Form 706):

The form has three main parts:

Part I – Election — Automatic upon filing and claiming the exclusion.
Part II – General Qualifications — Land description and ownership verification.
Part III – Computation of Exclusion — Detailed calculation of the excludable amount.

Attach Schedule U to Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return) when due (generally 9 months after death, with possible extensions).

Eligibility Requirements for the Qualified Conservation Easement Exclusion

To qualify for the exclusion on Schedule U:

Property in Gross Estate — The land (or interest in it) must be includible in the decedent’s gross estate.
Qualified Easement — The easement must meet Section 170(h) requirements and be granted to a qualified organization.
Ownership Period (3-Year Rule) — The decedent or a member of the decedent’s family must have owned the land during the 3-year period ending on the date of death (with exceptions for certain gifts or inheritances within the family). Question 2 on Schedule U addresses this.
Family or Entity Ownership — The exclusion applies to land owned directly or indirectly (e.g., through a partnership, corporation, or trust) if the decedent owned at least 30% of the entity.
Timing of Easement — The easement can be granted before death (by the decedent or family) or after death (by the executor or trustee, subject to rules). Post-death easements may also qualify for a charitable deduction on Schedule O.
No Double-Dipping — Coordinate with any charitable contribution deduction claimed for the easement.

Family members include the spouse, ancestors, lineal descendants (including of the spouse or parents), and their spouses. Adopted children count as blood relatives.

Benefits of Claiming the Exclusion

Tax Savings — Exclude up to 40% of the value of the land (excluding improvements in some calculations) from the gross estate, subject to limitations.
Conservation Legacy — Permanently protects farmland, forestland, wildlife habitat, or scenic open space for future generations.
Flexibility — Works alongside lifetime income tax deductions for conservation contributions and special-use valuation (Schedule T).
Estate Liquidity — Reduces the taxable estate, potentially avoiding or minimizing the need to sell land to pay estate taxes.

The maximum exclusion is generally capped at $500,000 (per sources referencing the computation limits), though the percentage-based amount is the primary driver.

How to Calculate the Exclusion (Part III of Schedule U)?

The computation is complex and often requires professional valuation. Here’s a simplified overview based on the form lines:

Line 4 — Estate tax value of the land subject to the easement.
Line 7 — Value of any retained development rights.
Line 8 — Line 6 (adjusted land value) minus retained rights.
Line 9 — 30% of Line 8 (base).
Line 10 — Value of the qualified conservation easement (FMV reduction due to the easement).
Percentage Adjustment — If the easement (Line 10) is at least 30% of the adjusted land value, the exclusion percentage is 40%. If lower, it phases down (detailed formulas on Lines 11–14).
Further Reductions — Subtract charitable deductions claimed (Line 15) and indebtedness on the land (Line 16).
Line 19 — Apply the applicable percentage to the net land value.
Line 20 — The exclusion amount (smaller of the computed amount or any applicable limitation). Enter this on Form 706, Part V, item 12.

Key Limitations:

The exclusion cannot exceed the easement’s FMV impact.
Retained development rights must generally be extinguished (with a binding agreement) or the value is reduced.
Appraisals must use qualified “before and after” valuation methods.

If values at the date of contribution differ from date-of-death values, a separate worksheet may be required.

Step-by-Step Guide to Completing and Filing Schedule U

Gather Documents — Easement deed, appraisals, title information, entity ownership details.
Complete Part II — Describe the land (reference Schedule A or other schedules) and the easement (grant date, grantor, terms).
Answer Qualifications — Confirm 3-year ownership and other criteria.
Compute in Part III — Follow line instructions precisely; attach worksheets and calculations.
Attach to Form 706 — Include supporting documentation.
File Timely — With the estate tax return (or extension). The election is irrevocable.

Use the official PDF: Schedule U (Form 706) and full instructions.

Required Documentation and Common Pitfalls

Essential Attachments:

Copy of the conservation easement agreement.
Qualified appraisal(s) showing before-and-after values.
Descriptions of the land and easement.
Agreement to extinguish retained development rights (if applicable), including consents and liability statements.
Any worksheets for alternative valuations.

Common Pitfalls:

Inadequate or non-qualified appraisals.
Failing the 3-year ownership test or perpetuity requirements.
Claiming both the exclusion and an income tax deduction improperly.
Not properly handling retained rights or post-death grants.
Missing coordination with other Form 706 schedules (e.g., Schedule A for real estate, Schedule O for charitable deductions).

Tip: Engage a qualified appraiser experienced in conservation easements early. State laws on easement enforceability also matter.

Conclusion: Planning Ahead for Conservation and Tax Efficiency

IRS Form 706 Schedule U offers a powerful tool for families to protect land while reducing estate taxes under Section 2031(c). Whether the easement was granted during life or after death, proper planning and documentation are essential to maximize the exclusion and withstand IRS scrutiny.

For the latest forms, visit IRS.gov/Form706. Review the Instructions for Form 706 (Rev. September 2025) and Schedule U (August 2025) directly.

Next Steps:

Consult an estate planning attorney and tax advisor familiar with conservation easements.
Work with a land trust or qualified organization to draft or review the easement.
Obtain professional valuations well in advance.

Protecting your land’s natural value while providing tax relief for heirs is a win-win when done correctly. Check IRS.gov for any updates after 2025, and always rely on personalized professional guidance.

Sources and Further Reading:

IRS Schedule U (Form 706) PDF (August 2025).
Instructions for Form 706 (September 2025).
IRC Section 2031(c) and Section 170(h).
Additional guidance from land trust organizations and IRS publications.

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