For a section called “Field Notes,” my qualifications these days are questionable. Previous editions of Field Notes have involved such things as vivid descriptions of wildlife encounters or where to find wild rose bushes, but, on a typical day, my field work involves fewer work boots and compasses than calculators and legal pads. In that spirit, and since tax season is right around the corner, I thought I would discuss the recently enacted law that enhances the tax incentives associated with conservation easements in the form of an exciting and easy-to-understand example…OK, probably not exciting, but hopefully understandable, at least.
Say Mr. Green owns the Jump Off Ranch, which he runs as a working cow-calf ranch and from which he gets essentially all of his $60,000 per year income. Being a conservation-minded fellow, Mr. Green donates a conservation easement on the Jump Off Ranch to the local land trust that ensures that the ranch will remain in its wide-open state, available for wildlife and agriculture, in perpetuity. An appraiser tells Mr. Green the conservation easement is worth $1,000,000, which is the difference in the value of the ranch before and after the conservation easement is in place. That $1 million is available to Mr. Green as a federal income tax deduction.
Under the old law, Mr. Green could use a mere $18,000 (30% x $60,000) of that deduction every year for six years, at which point it would go away, leaving $892,000 ($1 million – (6 years x $18,000/year)) of potential deduction on the table. Under the new law, by contrast, Mr. Green can use $60,000 (100% x $60,000) of that deduction every year for 16 years, eventually using up almost the entire $1 million and leaving just $40,000 ($1 million – (16 years x $60,000/year)) of potential deduction on the table.
The effect on tax savings is significant. Thanks to the new law, at current tax rates Mr. Green would save roughly an additional $160,000. For higher income earners, the effect is only magnified.
The new law that makes this possible works by changing several important rules regarding how conservation easement deductions may be used. First, it increases the number of years over which a deduction may be used from six to 16. Second, it increases the proportion of a donor’s taxable income that may be deducted against in a given year from 30% to 50%, and to 100% (!) for qualifying farmers and ranchers (like Mr. Green). The law also includes other provisions that make it easier for landowning corporations to use deductions, but we won’t get into those here. We also aren’t diving into the estate tax elements that motivate many landowners to consider conservation easements.
The practical consequences of the new law are that the tax incentives for conservation easements are a lot more useful to a lot more landowners.
The law applies to conservation easements completed in 2010 and 2011, extending a law that had expired at the end of 2009. The Land Trust Alliance (LTA) and others in the land trust community are working to make these incentives permanent, but they are currently set to expire at the end of the year. So, if you’ve been considering conserving land that you own, this could be a good time to meet with us.
Finally, the disclaimer. The story above is a simplified, fictional example meant to illustrate some positive aspects of the new conservation easement incentive law. Anyone considering conserving their property should consult with their own knowledgeable tax and legal advisors.
Tax policy changes may not be glamorous or exciting, but when the policies work it can lead to significant real-world successes. LTA, for example, estimates that the new law has increased the rate of land conservation in the United States by one third, to 1,000,000 acres per year. Now that’s a lot of rose bushes!
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