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Frequently Asked Tax Questions
about
Donation of Conservation Easements
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What tax benefits can result from donation of a conservation easement?
How does a landowner qualify for a federal income tax deduction?
How does a landowner quantify the income tax deduction for a donated easement?
Can a landowner deduct the entire value of a conservation easement from their
federal income tax?
Are the actual tax savings equal to the value of the deductions?
Can corporations derive income tax benefits from donated easements?
How can a conservation easement lower one’s federal estate tax?
Do
conservation easements have any other implications for federal income or estate
taxes?
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What tax benefits can result from donation of a conservation easement?
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The
primary tax benefits from donated conservation easements fall under two
categories; federal income tax deductions and a potential reduction of the
landowner’s estate tax.
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How does a landowner qualify for a federal income tax deduction?
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To qualify, a donated conservation
easement must be considered a charitable gift by the Internal
Revenue Service. It is essential for the
landowner to consult with his or her attorney and/or accountant to verify that
their donation will meet the IRS requirements.
Generally, this means that a donation must be made to an
IRS-qualified non-profit organization; the easement must be granted exclusively
for conservation purposes such as the preservation of natural resources or
historic sites; and the gift must be motivated by charitable intent and not
granted as a requirement for getting something in return.
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How does a landowner quantify the income tax deduction for a donated easement?
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The allowable income tax deduction will be based on the “value” of the development restrictions that are donated to a qualified organization in the form of a conservation easement. To establish that value, it is the landowner's responsibility to obtain a “qualified appraisal” rendered in writing by a “qualified appraiser.”
The appraisal will value the property in two ways; before a conservation easement is placed on the property and after an easement were to be placed on the land. The difference between the two dollar amounts becomes the monetary value of the charitable donation of the conservation easement. For example, if a landowner has 100 acres that were appraised at $10,000 per acre for a possible housing development (the before value), and $4,000 per acre as agricultural land (the after value), then the “value” of the conservation easement is $6,000 per acre or $600,000. This is the amount of money the landowner would give up if he or she decided to enter into a conservation easement that eliminated the prospect of some day developing the land into a housing project.
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Can a landowner deduct the entire value of a conservation easement from their
federal income tax? |
Currently IRS will allow a deduction up to 50% of the donor's annual “adjusted gross income” (AGI) in the
year that the donation is made. Any unused portion of the deduction can be carried forward and used over the
next 15 years, up to 50% of the donor's adjusted gross annual income in those years. An additional incentive
has been provided for “qualifying farmers and ranchers,” who can use the deduction up to 100% of their AGI
over 16 years. It is important to note that unless these new tax incentives are extended,
they will only apply to easement gifts made in 2006 and 2007! There are a number of variables
that must be accounted for to determine the usefulness of the donation deduction, so a professional opinion
should always be sought.
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Are the actual tax savings equal to the value of the deductions?
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The amount of taxes saved will depend upon the tax bracket of the landowner. If the landowner in the above example could use the entire $600,000 deduction and he or she was in a 25% tax bracket, the landowner would have a total tax savings of $150,000.
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Can corporations derive income tax benefits from donated easements?
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Like an
individual, C Corporations can take the deduction over six years,
but only up to 10% of their net income. In an S Corporation,
the deduction will pass through to shareholders but it can not
exceed their basis in the stock. In partnerships and LLCs, the deduction passes through to the owners
without the basis limitation.
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How can a conservation easement lower one’s federal estate tax?
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When a conservation easement is placed on the land it can remove a portion of the property's value from the estate. In the given example, the land's value for estate tax purposes would have been reduced from $1,000,000 to $400,000.
Additional IRS provisions may allow for other options to reduce estate tax. For example, under provisions of the 1997 Taxpayers Relief Act, if the easement is within 25 miles of a metropolitan area or National Park, up to 40% of the land's remaining after value can also be excluded from the estate. If the above example fit this qualification, it would amount to another $160,000 reduction (40% of $400,000) for estate tax purposes, with a total reduction from an original $1,000,000 before the easement, to $240,000 after.
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Do
conservation easements have any other implications for federal income or estate
taxes?
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Other options and/or
requirements may be possible on both income and estate taxes, depending on each
easement situation. Some of the easement costs such as appraisals and baseline
reports may be deductible, along with any donation of cash or securities for the
Stewardship Fund. To quantify potential income tax and estate tax savings
on an individual basis, a landowner should always seek professional advice from
their estate planner, accountant, and/or attorney.
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Please Note:
This
information is being provided as a convenience to potential donors. However The
Nebraska Land Trust is not a tax advisor, therefore you should not rely on the
accuracy of this information or its applicability to you or your situation. If
you donate an easement to The Nebraska Land Trust, the organization will not
serve as your attorney or tax advisor. Therefore, before going forward with a
donation, you should consult your own attorney and tax advisor.
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