The donation of a conservation easement that permanently protects certain significant conservation values that are beneficial to the public can often qualify as a tax-deductible charitable donation. Because conservation easements reduce a property’s development potential, the market value of the property is reduced commensurately. The value of the donation is the difference between the property’s value with and without the conservation easement, as determined by an independent appraiser. In many instances, a conservation easement donor can enjoy significant income and estate tax savings, which can help offset the acquisition costs of a new property and help family members pass land from one generation to the next. In addition, protecting land with a conservation easement may reduce one’s property taxes. For more information about the tax benefits of donating a conservation easement, please contact your tax professional.
Conservation easement donations can have four potential tax advantages: (a) the value of the easement may be considered a charitable gift and be deductible from your federal income tax, (b) the easement may reduce estate tax, (c) the easement may reduce your property tax, and (d) some expenses related to a conservation easement donation may be deductible.
(a) Federal Income Tax Deduction
A donated conservation easement that benefits the public by permanently protecting important conservation resources, and meets other federal tax code requirements, can qualify as a tax-deductible charitable donation. An enhanced federal tax incentive for conservation easements allows landowners to deduct up to 50% of their Adjusted Gross Income (AGI) for the year of the gift and up to fifteen (15) years following or until the value of the gift has been fully deducted. Farmers or ranchers who make at least half of their income from agriculture can deduct up to 100% of their income for up to 16 years. These enhanced incentives were made permanent in December of 2015, but are retroactively applicable to January 1, 2015.
A landowner need not donate the entire easement value. In order to achieve a mix of tax benefits and cash, the easement may be sold for an amount less than the fair market value. The difference between the easement’s appraised value and the sale price is considered a donation.
(b) Federal Estate Tax Benefits
In most cases, a conservation easement decreases the market value of property, resulting in reduced estate taxes. This fact can be essential to a landowner’s ability to pass undeveloped land intact to the next generation. Beyond the appraised value of the land, IRS allows the taxable value of property with a qualifying conservation easement to be reduced up to 40% more for estate tax purposes. Conservation easements placed postmortem within a certain amount of time also qualify for this benefit. Federal law regarding the taxing of estates is continually changing. Confer with your tax advisor and/or legal counsel to determine how a conservation easement might affect your estate planning.
(c) Property Tax Benefits
As stated above, a conservation easement decreases the market value of property in most cases. This decrease in the market value of property often results in reduced property taxes. Property tax laws vary state to state, and county to county. Check with your County to see how they determine property taxes.
(d) Deducting Expenses
You may be able to deduct expenses related to completing a conservation easement, such as the appraisal and legal or tax planning. The sum of such “miscellaneous deductions” must exceed 2% of your AGI. Additionally, the requested stewardship contribution is considered a deductible charitable donation.