Conservation Easements and Tax Deductions

With a conservation easement, you are giving up something of value, i.e. your development rights, and you deserve something in return. The tax benefits can be huge.

If you are considering a conservation easement donation, now may be the time to act.

The December 2010 tax deal brokered between President Obama and Congress gave us enhanced federal income tax incentives for the donation of conservation easements. Those incentives previously had been on-again-off-again, but are now permanent. Any conservation easement (but not land) donations now qualify for the incentives. These incentives:

  • Raise the income tax deduction a conservation easement donor can take from 30% of their income in any year to 50%;
  • Allow farmers (which includes those who derive the majority of their income from forest management) and ranchers to deduct up to 100% of their income; and
  • Increase the carryover period (i.e., length of time over which a donor can claim deductions) from 6 to 16 years.

For example:

Under the old rules, a landowner with an AGI of $50,000 who donated a $400,000 conservation easement could take a $15,000 deduction in the year of the donation and $15,000 per year for the next five years. His total deduction would be $90,000. The remaining $310,000 would in effect be lost.

Under the new rules, the same landowner would be able to deduct $25,000 in the year of the donation and then $25,000 per year for an additional 15 years (assuming his income remains the same). In this case, the deduction would total $400,000, the entire value of the conservation easement. When you file your taxes, both the appraiser and the land trust must sign your IRS 8283 form.

Accuracy-Related Penalties

The Pension Act imposes accuracy-related penalties of 20 percent for an underpayment of tax resulting from a “substantial” valuation misstatement and 40 percent for a “gross” valuation misstatement. A “substantial” valuation misstatement is a value 150 percent or more of the amount determined to be the correct value, and a “gross” valuation statement is a value 200 percent or more of the amount determined to be correct.

The Pension Act also eliminates the reasonable cause exception in the case of any “gross” valuation misstatement. This means that the taxpayer may not rely upon an “I thought I received good professional advice” defense. The Pension Act also streamlined the procedural requirements for the Secretary of the Treasury to impose civil penalties or disciplinary action against an appraiser.

All of this means its up to you to hire a competent, experienced, appraiser because its you who pays the penalties (the appraiser pays penalties too!). Remember, you’ve given up some development rights forever and you could pay an IRS penalty if the appraisal is faulty.
When you file your taxes, both the appraiser and the land trust must sign your IRS 8283 form.

Estate Tax Reductions and Exclusions

For landowners who will leave sizable estates upon their death, the most important financial impact of a conservation easement may be a significant reduction in estate taxes. Estate taxes often make it difficult for heirs to keep land intact and in the family because of high estate tax rates and high development value of land. It may be necessary to subdivide or sell land for development in order to pay these taxes which may not be the desire of the landowner or their heirs. A conservation easement can often provide significant help with this problem in three important ways:

  • Reduction in Value of Estate. The deceased’s estate will be reduced by the value of the donated conservation easement. As a result, taxes will be lower because heirs will not be required to pay taxes on the extinguished development rights. In other words, heirs will only have to pay estate taxes on preserved farmland values, and not full development values.
  • Estate Exclusion. Section 2031(c) of the tax code provides further estate tax incentives for properties subject to a donated conservation easement. When property has a qualified conservation easement placed upon it, up to an additional 40% of the value of land (subject to a $500,000 cap) may be excluded from the estate when the landowner dies. This exclusion is in addition to the reduction in land value attributable to the easement itself as described above.
  • After Death Easement. Heirs may also receive these benefits (but not the income tax deduction) by electing to donate a conservation easement after the landowner’s death and prior to filing the estate return (called a “post mortem” election).

Issues to Consider

  • As is the case with any property interest, a conservation easement may be taken by eminent domain (and thereby extinguished) when the public value of the proposed project exceeds that of the conservation interest being protected by the easement.
  • Conservation easements may result in a significant reduction in the sale price of the land because a builder can no longer develop it. In fact, this difference in value is the basis for the granting of the original tax incentives.

Watch Video: Claiming Your Tax Deduction for Your Conservation Easement