Tax Benefits of Conserving Land
The primary reason most landowners donate conservation easements is to preserve the natural, scenic, and historical qualities of their land forever. Others may want to establish a legacy for their children and grandchildren. But, there also can be significant tax advantages associated with a donation.
A gift of a conservation easement may qualify as a non-cash charitable gift which may yield a deduction for federal income tax purposes and a credit for state income tax purposes. To realize those financial benefits an easement must: be given in perpetuity; be given to a qualified governmental or non-profit organization to monitor; have a qualified appraisal; and be donated exclusively for “conservation purposes” characterized by significant natural, scenic, historic, scientific, recreational, or open space value. In addition, there may be local property tax reductions and federal estate tax exemptions. A qualified appraiser must establish the fee simple value of the property and the amount by which the restrictions in the easement reduce the property's fee simple value. The difference between the fee simple value and the fee simple value as restricted by the easement is the easement value, which is primarily based on the value of the development rights forgone by the donor. The appraised easement value is the basis for calculating tax benefits.
The following summary of the tax benefits of conservation easements is for informational purposes only. The Federal Charitable gift deduction information is taken from the Land Trust Alliance website. Consult an attorney and/or accountant for professional advice on the implications of a donation on your own tax situation. In tax years 2006-2013, a Federal tax incentive for conservation easement donations helped thousands of landowners to conserve their land. Unfortunately, the conservation tax incentive expired December 31, 2013. Despite broad Congressional support, gridlock has prevented legislation to make the enhanced tax incentive permanent from moving forward. Starting January 1, landowners will still be able to take a deduction for donating easements, but will not be able to use the enhanced provisions.
Conservation easements remain deductible, but will be subject to the same caps as other non-cash contributions -- 30% of AGI with a 5-year carry forward.
Federal Charitable Gift Deduction
The donation of a conservation easement is treated as a charitable gift and donors can deduct the value of the easement from their income for federal tax purposes. A qualified appraiser will calculate the value of the conservation easement by determining the value of the donor's land before the easement is given, then subtracting the value of the land after the easement is donated. For tax year 2014 currently, the value of a conservation easement donated can be deducted at a rate of 30% of the donor's adjusted gross income (AGI). Any unused portion of the easement donation may be carried forward for an additional five years or until the donation is fully expended, whichever comes first. To learn more about tax benefits of land protection, visit the Land Trust Alliance at www.lta.org.
Virginia State Income Tax Credit
The "Virginia Land Conservation Incentives Act of 1999," as amended, provides Virginia taxpayers who donate a conservation easement a tax credit of an amount equal to 40% of the value of a gift of easement or land. The amount of credit claimed by any one taxpayer may not exceed $100,000 for tax year 2012 and beyond, and any unused amount may be carried over for the next ten years. Any portion of the unused tax credit can be transferred and or sold to other taxpayers. This is the most effective conservation tool in the state today, enabling landowners regardless of the income level to receive cash in exchange for conserving rural land. The Virginia Department of Taxation does impose a transfer fee on the sale of land preservation ta credits. This fee is calculated as either 2% of the value of the donated conservation interest or 5% of the face value of the transferred credits. Since 2008, the total amount of tax credits available statewide has been capped at $100 million, adjusted for inflation annually. If the cap is reached, all remaining applicants are automatically placed in the "queue" for the following calendar year.
(These tax credits can be sold for you by tax credit brokers usually at a discount on face value and typically net around 75-85% of their face value. The State collects a 5% transfer fee at the time of sale or transfer that is calculated on the value of the tax credits sold. In addition, the broker will charge a fee that typically ranges from 4-7% of the face value of the tax credits.)
As an example:
Original value of property: $260,000
Value of property with easement: - $160,000
Value of easement equals: $100,000
State Tax Credit: (40% x $100,000) $ 40,000
Tax Credits Sold @ 80 cents per dollar $ 32,000
State Transfer Fee (5% x $40,000) - $ 2,000
Broker Fee (6% x $40,000) - $ 2,400
NET FROM SALE OF TAX CREDITS $ 27,600
In addition, for purchased easements, a Virginia state capital gains tax exclusion permits a landowner to exclude capital gains from the sale of land on which an open space easement has been placed and on which Virginia capital gains tax would otherwise have been levied.
Local Property Taxes
Real estate taxes may be reduced by placing an easement on the property. However, if the easement is given on land devoted to agricultural, forestal, horticultural, or open-space use, which is already assessed at "use value," there may be no further reduction in local real estate taxes.
Estate Tax Reduction
By donating an easement, landowners reduce the overall value of their estate by the value of the easement, which may translate into less or possibly no estate tax due. In addition, there may be an estate tax exclusion of up to 40% of the appraised value of land protected by a conservation easement. The intent of this provision is to provide relief from estate taxes for farmers and ranchers passing land to their children who might otherwise be forced to sell the land to pay estate taxes. Please check with the IRS on current Federal tax laws for updated information.
* NNLC does not give tax advice. Please check with your tax advisor or attorney about qualifying for any tax benefits associated with conservation easements.