Recent amendments to our tax laws provide conservationists with additional incentives to protect the natural beauty of their land. Landowners who relinquish their land development rights by donating a conservation easement can ensure that the natural beauty of their land is preserved in perpetuity. Currently, donors also receive tax breaks at the federal and state levels. For those who have already achieved their financial goals, donating their land development rights can bring additional the tax benefits.
On August 17, 2006, President Bush signed into law H.R. 4, a bill that significantly expanded the federal tax incentives for landowners who voluntarily give up the development rights to their property by placing their land under a conservation easement.
A conservation easement is a legal agreement between a landowner and a conservation organization that protects the natural, historic, scenic, and agricultural values of a property by placing permanent limits on the future development of the property. Giving these rights to a non-profit organization is similar to making other gifts to charity. As with gifting to a non-profit organization, taxpayers reap not only the benefit of donating to worthy cause but they also gain some tax relief.
“While people donate easements because of their love of the land and their desire to see it protected in perpetuity, there are also significant tax incentives associated with a donation. For many easement donors, this translates into substantial savings on their federal, state, estate, and local property tax bills,” writes the Piedmont Environmental Council, one of the Commonwealth’s most active organizations working with landowners who desire to ensure the beauty of their land remains for generations to come. In fact, the organization has been instrumental in placing 250,000 acres under easement in the Commonwealth.
The tax benefits for giving up development rights in some cases are significant both at the federal and at the state level. But the new provisions apply to easements donated only in 2006 and 2007. However, the PEC is working actively to see that these benefits are extended or made permanent.
The PEC outlines the benefits as follows:
“Income Tax Deductions -The gift of a conservation easement that meets federal tax code requirements is considered a charitable deduction, and the value of the easement can be deducted, within certain limits, from the donor’s income. A qualified appraiser will calculate the value of the easement by assessing the value of the donor’s land before the easement is given, then subtracting the value of the land after the easement is donated. As a result of new legislation, easements donated in 2006 and 2007 can be deducted at the rate of 50% of the donor’s adjusted gross income per year and the unused portion of the gift may be carried forward for an additional fifteen years or until value of the donation is fully expended. This expansion on the rate of deduction is particularly helpful to those landowners who do not have a large taxable income. Farmers who receive more than 50% of their income from agricultural activities can deduct up to 100% of their income.”
“State Income Tax Credit – When a landowner permanently preserves their property, he or she may also be eligible to receive a Virginia income tax credit of 50% of the value of the restriction. The landowner may use the credit to offset taxes owed and sell any unused portions of the credit to other Virginia taxpayers for 6 years or until credits are fully expended. Because the tax credit can be sold to other Virginia taxpayers, this benefit is particularly useful for people who do not have large taxable incomes.”
“For easement donations made after January 1, 2007, the Virginia income tax credit is only 40% of the value of the donated interest, but the credit can be claimed in the year of the donation and carried forward for an additional 10 years.”
“Estate Tax Benefits – Estate taxes can make it difficult for landowners to pass land on to their children. Heirs may be forced to sell all or part of their land in order to meet their tax obligations. This is because estate taxes owed can represent a significant percentage of the value of the property.”
“An easement can significantly lower estate taxes in two ways: (1) since the easement reduces the value of the property, the estate taxes will be lower; and (2) under the American Farm and Ranch Protection Act, if a landowner donates an easement, his or her heirs can exclude up to 40% (capped at $500,000) of the remaining value of the land from the estate taxes owed.”
The new federal rules allow modest income donors to utilize more of the deduction resulting from their donations. As an example, imagine that a landowner earning $50,000 a year donates a $1 million conservation easement. Under federal law they can deduct $25,000 in the year of the donation and carry forward the balance for an additional 15 years, bringing the total to $400,000 in deductions. If the landowner qualifies as a farmer or rancher they could deduct their entire $50,000 income, pay no tax for 16 years, and take a maximum of $800,000 in deductions for his million dollar gift. Donors with greater incomes can use the full $1 million gift in fewer years.
Before executing a conservation easement donation, you should be certain that you never want the property developed. You should also be certain that you do not need the full market value of the developed property in order to meet your financial goals, including your retirement lifestyle or the inheritance value you wish to leave to your heirs.
The rules and tax laws regarding conservation easements are complex and dependent on details specific to an individual donor and their property. Getting advice from your attorney, accountant, and investment advisor is essential to determining if an easement donation will help you meet your life goals.
Potential easement donors should know that the donation of a permanent conservation easement is a permanent and rewarding commitment. For more information on conservation easements, visit the Piedmont Environmental Council at www.pecva.org. To find a fee-only financial planner in your area please visit www.napfa.org.
* Portions of PEC materials used with permission.
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