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Conservation Easement Basics
Financial Considerations
Conservation Easement Basics

Tax Consequences of Donating a Conservation Easement

Federal and state tax benefits of donating a conservation easement can be significant depending on key variables:

1. Donor’s income. The higher the income the greater the tax savings.

2. Value of Donated Easement. The higher the value the greater the tax deduction.

3. Length of Ownership. Benefits are greater if property owned in excess of one year.

4. Use of Property. Donor’s that derive a majority of their income from productive use of the land (agriculture or forestry) have greater incentives to donate an easement.

Financial Considerations

Determining the Value of a Conservation Easement

What is a "Stewardship Endownment"?

Tax Consequences of Donating a Conservation Easement

Additional Financial Considerations

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Federal Tax Benefits

The federal tax benefits of donating conservation easements are defined under Section 170 of the IRS Code. Enhanced federal tax benefits were extended by Congress for 2013.  Efforts to make these incentives permanent are continuing but the likelihood is uncertain given the challenges of implementing federal policy changes in Washington. Tax benefits that are derived from the donation of a qualified conservation easement relate to two incentive levels:

1. Basic Level. Most individuals (including individual members of pass-through entities such as S-Corps, LLCs and Partnerships) that donate a conservation easement can treat the value of the conservation easement as a charitable deduction for income tax purposes. The amount of the deduction is limited to 50% of their Adjusted Gross Income (AGI) in any one year. If there is excess donation value, it can be carried forward for up to fifteen years, again subject to the 50% limitation. 

2. Enhanced Level. Individuals and members of qualifying pass-through entities that derive more than 50% of their gross income from the business of farming and ranching, can deduct up to 100% of their AGI from federal income tax in any one year and carry forward any excess donation value for up to 15 years, again subject to the 100% limitation. In addition, corporations that meet the 50% gross income threshold can deduct the value of the gift of a conservation easement to the extent of all corporate taxable income and carry forward the remaining amount for a period of 15 years. Corporations that are eligible for this deduction cannot be publicly traded companies. 

State Tax Credits

Currently fifteen states offer tax credits for donation of conservation easements. As many as six additional states are considering adding conservation easement tax credits. The value of the incentive varies widely among states, with Colorado offering the most generous tax credit. All those states that offer tax credits permit donors of conservation easements to obtain varying levels of tax credit against state income tax. Five states—Colorado, New Mexico, South Carolina, Georgia and Virginia—permit the tax credits to be transferred to other state taxpayers. Usually such tax credits are transferred at some level of discount to the seller, generally varying from 15 to 30%, to individuals or corporations that have high state income tax liability. In states that have transferable tax credits, brokerage businesses have developed to match buyers and sellers of the credits. Such programs have greatly expanded the attractiveness of conservation easements in those states.

(See state-by-state breakdown of state tax credit programs - in Resources???).

Local Tax Benefits

In most locations the local tax benefits of donating a conservation easement are minimal. These relate primarily to local property taxes that may in some cases decline because of the restrictions on future development. In many Western states, the effect of a conservation easement is to ensure that the land will be valued at it’s preferred agricultural use value, generally the lowest assessed value land class. As land values appreciate over time conservation easements will likely serve to limit the increase as opposed to other land classes. Some landowners have found that local assessors sometimes have not understood the impact of conservation easements and attempted to tax the value of the extinguished development rights. These efforts have generally been unsuccessful.

Examples of Calculated Tax Benefits

Content for this area is pending. Please check back soon.

Like-Kind Exchanges of Conservation Easements

Landowners that sell conservation easements to land trusts and governmental entities can do so in tax efficient ways that defer taxes on the transaction and help them obtain additional property at the same time. This is possible through what is referred to as a 1031 like-kind exchange, so named for the section of the IRS Code to which it refers.

A landowner that sells a conservation easement will generally owe taxes on the amount he receives. However, by using a like-kind exchange, the landowner may be able to defer taxes if he exchanges a conservation easement for additional land. This practice is particularly useful to a farmer or rancher, who can exchange a conservation easement on his property for a similarly valued parcel of farm or ranchland without triggering tax.

A like-kind exchange must satisfy several requirements before it can qualify for this tax benefit. Most importantly, the properties involved must be held for investment or for productive use in a business, such as agriculture. A tax professional, exchange company or experienced land trust generally can help landowners develop an appropriate easement and structure the transaction to satisfy the tax rules.

In a like-kind exchange, the landowner identifies a parcel of land of comparable value to the value in the conservation easement. The land trust or governmental entity desiring to purchase the easement would instead purchase the land. Through the exchange the land would be “traded” for the conservation easement. The landowner will have to report the transaction to the IRS but will not owe any taxes. The tax rules also permit certain neutral companies know as qualified intermediaries to purchase property and perform the exchange within time limits established by the IRS. In this manner the intermediary handles the multiple transactions, simplifying the process for the three parties. Landowners that select an intermediary to handle the transactions should carefully review the qualifications of candidate firms, as the industry is largely unregulated.

Click here to view the IRS Code Section 1031...

Click here to view list of 1031 Exchange Companies

Selling Tax Credits

Currently four states—Colorado, New Mexico, South Carolina and Virginia—permit state tax credits to be sold or “transferred” to other state taxpayers. The tax credits sell at a discount of 15 to 30%, depending on the market in the particular state. As a result, the taxpayers purchasing the tax credits are able to reduce their tax liability by the amount of the discount that they are able to negotiate with the sellers of the tax credits. As the business of matching buyers and sellers of transferable tax credits has grown, brokers or exchange companies have evolved to manage the business. These firms charge a commission for their service in matching buyers and sellers and since they are not regulated should be carefully examined prior to doing business with them.

(See list of Tax Credit Exchange companies - in Resources???)

Estate Planning Benefits of Conservation Easements

Conservation easements can be a powerful estate planning tool if used properly. The American Taxpayer Relief Act, passed at the end of 2012 eliminated the fluctuating estate tax rates and exemption levels that had created great uncertainty in the previous decade.  Beginning in 2013 the estate tax rate is set at 40% for those estates valued greater than $5 million, indexed to inflation.

Proper estate planning is necessary for those with substantial land holdings. To often landowners delay estate planning decisions until family members die and find that they have only a short period of time to pay sizable estate taxes, sometimes forcing a liquidation of the property on less than ideal terms just to satisfy the tax bill. One tool that tax advisors should consider is the conservation easement. This is because a conservation easement is a powerful tool to reduce the value of a land asset and will continue to be one of the most effective ways of minimizing the impact of the estate tax and keeping land in family ownership. 

In addition to reducing the value of estates subject to estate taxation through conservation easements, Section 2031 (c) of the IRS Code provides an additional benefit. According to this provision, for properties that are placed under conservation easement, 40% of the land value, up to a maximum of $500,000, may be excluded from a taxable estate if the easement satisfies certain criteria. The conservation easement must not permit more than a de minimus amount of commercial recreational activity on the property. While de minimus is a subject to interpretation, it would not prohibit hunting and fishing activity. In order to qualify for this benefit, the decedent must have owned the property for at least three years prior to death. As long as these criteria are used, the benefit can be utilized numerous times for the same property.

Federal Tax Forms

Donor’s of conservation easements and their tax advisors must be careful to properly fill out federal Form 8283 and timely file it with their tax return for the tax year in which they donated the conservation easement. The IRS will rely on the information on this form if there are questions about the easement. In addition, the form is confusing and instructions should be carefully followed. Failure to fully and correctly fill out the form unfortunately can be used against the taxpayer if the IRS questions the validity of the conservation easement. Increasingly the IRS is using this form when it contests the validity of a conservation easement.

Several key points need to be made about this form. First, all information requested should be supplied; it is not sufficient to leave blanks on the form. If you don’t know or have the information, then explain why on the form. Failure to provide the information requested can be used against you. Second, if the value of the easement donation was greater than $500,000 you must provide a full copy of the appraisal with your tax return. Third, while the form should not be signed by the donor of the easement, it needs to be signed by both the appraiser and a qualified representative of the land trust or governmental entity. Finally, the instructions for the form ask for a separate statement to be provided with the form providing information and representations from the donor. Many donors fail to provide this information since it is not specifically identified on the form. Failure to do so exposes the donor to liability if there are questions about the easement’s validity.

Federal tax forms (990) must also be filed by the land trust. A donor of a conservation easement should ask the land trust to confirm that its tax filings are up to date and if there are questions, ask to see a copy. Nonprofit entities like land trusts, must be in good standing or they could jeopardize donations that are made to them. The best thing to do is to work with a land trust that is either accredited in some form or can demonstrate that they are tax compliant.

Federal Tax Form 8283:  Download Form (PDF)  |  Form 8283 Instructions (PDF)

Federal Tax Form 990:  Download Form (PDF)  |  Form 990 Instructions (PDF)

Donee Acknowledgement Letter

IRS regulations state that the donor of a conservation easement should receive written acknowledgement of the gift from the donee organization (land trust or governmental entity). This contemporaneous letter of acknowledgement should be received by the donor prior to the filing of the tax return for the year in which the gift is made. The letter should acknowledge the receipt of the gift and also state whether any gifts and services were rendered to the donor in return for the gift. Failure to have such a timely acknowledgement in hand can complicate resolution of an IRS contest of the validity of a conservation easement.

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