What are the tax benefits of donating a conservation easement?
Qualifying for tax benefits.
The tax advisor and appraiser hired by the landowner are responsible for making sure the conservation easement qualifies for tax benefits under the federal tax code. The Land Trust has prepared a packet of introductory materials for landowners and their professionals. Click here to download the packet.
Income tax benefits through 2009
Landowners donating qualifying conservation easements through December 31, 2009 may be eligible to deduct up to 50% of their adjusted gross income each year for the year of the easement donation and the following fifteen years, or until the value of the easement gift is used up, whichever occurs first. Depending on the landowner’s residence, state income tax deductions may also be available. Landowners considering the gift of a conservation easement should consult with their legal or tax advisors to learn how the gift may benefit them financially.
Example: (We provide an example of a calculation of easement value for illustration only. The property described is a model, not an actual property. TRLT does not appraise property values, and recommends that landowners seek the advice of their personal legal and financial advisors.)
John and Emma Smith own 250 acres of land along the South Fork Snake River in Madison County and wish to retain the right to build one house with a small guesthouse. The Smiths will retain use of their property for recreation and ranching.
The Smiths hired an appraiser with extensive conservation easement appraisal experience. After researching the sales of comparable properties already under conservation easement, the sales of developed and undeveloped properties and the terms of the conservation easement, the appraiser calculated the value of the conservation easement on this 250-acre property to be $900,000.
The Smiths make $140,000 a year, giving them a tax deduction of $70,000 a year for twelve years, with the remainder of the deduction left to be taken in year 13.
100% Deductibility for Qualified Farmers and Ranchers
Landowners who meet the IRS definition of “qualified farmers and ranchers” may be allowed to take the deduction up to 100% of their adjusted gross income with a 15-year carry forward. A “qualified farmer or rancher” earns more than 50% of his/her gross income for the taxable year in which the conservation easement is donated from ranching or farming.
Estate Tax Benefits
The donation of a conservation easement may help family land stay in families’ hands. The heirs of easement donors may be able to exclude from their taxable estates up to 40% of the value of land subject to a qualifying conservation easement.
In addition, the conservation easement reduces the fair market value of property by restricting the amount and type of development that can occur. This reduction also reduces the size of the estate.
Those who inherit valuable land that’s unprotected may be able to use 2031(c) of the federal tax code to make a post-mortem election to donate a conservation easement, which could save them considerable estate taxes.