SUMMARY OF THE TAX BENEFITS OF A
CONSERVATION EASEMENT
A conservation easement is a legal agreement between a landowner and a land trust or government agency that permanently limits future development of the land in order to protect its conservation values.
- The terms of the easement are negotiated between the landowner and the organization that will hold the easement (the vast majority of easements in Virginia are held by the state-established Virginia Outdoors Foundation).
- The primary provision of a conservation easement is a limit on subdivision of the property.
- Landowners continue to own, use, and control their land, and can sell it or pass it on to heirs.
- Easements generally allow for the continuation of current uses such as agriculture, forestry, hunting, and fishing.
- An easement does not require landowners to provide public access to their land.
- Depending on the size of the property, the landowner may retain the right to build one or more additional structures, or do one or more subdivisions.
- Easements protect the land "forever" – the terms of the easement apply to all future landowners.
- The organization holding the easement is responsible for making sure the easement's terms are followed.
What
are the benefits of donating an easement?
The primary reason landowners donate conservation easements is to preserve the natural, scenic, and historical integrity of their land forever. Many want to establish a legacy for their children and grandchildren. Most value the peace of mind knowing that their land will be always protected from development.
In addition, there are significant income tax and estate
planning benefits. In fact, the combined tax savings could be well over the
reduction in land value due to the easement. In order to be tax-deductible,
the easement: a) must be given in perpetuity; b) must be given to a qualified
governmental or non-profit organization; c) must have a qualified appraisal; and
d) must be donated exclusively for "conservation purposes" (in other
words the property must have some significant natural, scenic, historic,
scientific, recreational, or open space value).
1. Federal Income Tax Deduction. The donation of an easement is treated as a charitable gift and the value of the easement (the value of the property pre-easement minus the value of the property post-easement) may be deducted from the donor's income for purposes of calculating income taxes.
- Deduction is limited to 30% of the landowner’s adjusted gross income in the year the donation is given (the unused portion of the gift may be carried forward to be used as a deduction for an additional five years, subject to the 30% limit each year).
- Alternatively,
the landowner may elect to reduce the amount of the deduction to the basis
of the property. Then the value of the gift (as reduced to basis) will be
deductible up to 50% of the landowner’s adjusted gross income (for one
plus five years). This election may be advantageous to the landowner if
the donation of an easement is made shortly after acquiring the property.
2. Estate tax reduction. Estate taxes
can be as high as 55% of the value of the donor’s estate. In many cases, a
landowner’s heirs must sell the property just in order to pay estate taxes.
By donating an easement, landowners can reduce these taxes in two ways:
- First, the estate will have been reduced by the value of the easement (smaller estate value means less—or perhaps no—estate tax due).
- Secondly, the American Farm and Ranch Protection Act of 1997 allows heirs to exclude up to an additional 40% of the remaining value of their land from estate taxes.
3. Reduced real estate taxes. In counties where "use value" taxation is in place, land subject to an easement is automatically entitled to taxation at use value rates. In localities which do not have use value taxation, land under easement is required to be assessed without regard to the development value that has been extinguished by the easement.
How
do the Tax Benefits AssociatedWith a Conservation Easement Work?
While many people
donate easements because of their love of the land and their desire to see it
protected, there are significant tax advantages that go along with a donation.
These advantages include federal estate tax benefits, as well as income
tax and property tax savings.
Federal
Income Tax Benefit
Value of land before easement: $1,000,000 Value of easement: 300,000 Value of land after easement: 700,000 Donor’s annual income: 145,000 Maximum annual deduction: 43,500 Total deduction over 6 years: 261,000
Estate
Tax Benefit
Estate taxes can be as high as 55 percent of the estate’s value. If a landowner has real estate worth $500,000 upon his or her death, heirs may have to pay up to $275,000 in estate taxes. Conservation easements reduce the value of property for estate tax purposes. The American Farmer and Ranch Protection Act allows heirs to exclude an additional 40 percent of the land’s value from estate taxes.
Oldham
Ahead recommends you consult your attorney or accountant for additional details,
to include state and local tax benefits.
Source: The Piedmont Environmental Council
American
Farm and Ranch Protection Act: Estate Taxes
The legislation, designed to provide a major new incentive for voluntary land
conservation in America a well as estate tax relief for rural landowners, was
enacted August 5,1997, as part of the $95 billion Taxpayer Relief Act.
Click below for details on the Act.
