Step 3: Tax Benefits of a Conservation Easement

One step of Six Steps to a Happy Conservation Easement

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 extends through the end of 2011 the enhanced federal income tax incentives for the donation of conservation easements. Those incentives previously had expired at the end of 2009. Any conservation easement (but not land) donations made in 2010 or 2011 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.

This tax deduction expires at the end of 2011.

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 deduction.