The Tax Benefits of Conservation Easements
Update: Enhanced Tax Incentives for Conservation Easements Made Permanent!
On December 18, 2015, the Senate voted to pass a bill that included making the enhanced deductions for conservation easement donations permanent rather than simply extend them in the short-term as has been done in the past. The House of Representatives passed the bill in April and once the Senate voted on the bill in December, President Obama signed it into law, officially solidifying the enhanced tax incentives as a permanent tax incentive.
The incentive has three components:
- raising the deduction a landowner can take for donating a conservation easement from 30 percent of his or her adjusted gross income in any year to 50 percent;
- allowing qualifying farmers and ranchers to deduct up to 100 percent of their adjusted gross income;
- extending the carry-forward period for a donor to take tax deductions for a voluntary conservation agreement from five to 15 years.
The conservation purposes as defined by the Internal Revenue Service determine your eligibility for tax deductions. The four conservation purposes are defined in Internal Revenue Code (IRC) § 170(h) – Qualified Conservation Contribution. A tax advisor will be able to help you with all tax deduction determinations.
There are three main tax benefits available for placing a conservation easement on your property, all of which can be enjoyed in combination. The Land Conservancy for Southern Chester County strongly advises that you work with a competent and experienced tax advisor who can plug your financial information into an income tax planning software and tell you precisely what your individual income tax results will be. The same goes for estate tax planning advice.
A willing landowner is the key to conservation
- Income Tax Deduction: When you place a conservation easement on your property you are entitled to an income tax deduction for the development value that you have given up. Generally, if the easement is donated, the deduction is equal to the value of the land before the easement (its unrestricted fair market value, or what you could get for it if you sold it outright on the open market) minus the value of the land after you have restricted its development with the easement.Example: Aunt Lily has property that is worth $1,000,000 on the open market. Aunt Lily places the property under conservation easement, generally restricting the land to agricultural/ equestrian uses. The value of the land encumbered by the easement is estimated at $600,000.If the land has a value of $1,000,000 before the easement and $600,000 after the easement the value of the income tax deduction available to Aunt Lily is $400,000, the difference between the “before and after” property values.Note: If Aunt Lily sold the conservation easement for $200,000 (bargain sale) her income tax deduction would be reduced to $200,000 ($400,000 -$200,000 = $200,000).Percentage of Income and Carry Forward: The IRS allows a landowner to use their income tax deduction up to 50% of their adjusted gross income for the first year and then carry the balance forward for an additional fifteen year period.
Example: If Aunt Lily has a deduction value of $400,000 and an income of $100,000 she can deduct $50,000 the year of the easement, and if her income does not change, she is entitled to deduct $50,000 each year for fifteen more years or until the $400,000 is exhausted, whichever comes first.
Note: Aunt Lily can elect to deduct up to 100% of her adjusted gross income for the year, again with a five year carry-forward if she is a qualifying farmer or rancher under 170(h) of the tax code.
- Estate Tax Savings: When you place a conservation easement on your property, you reduce the development value of the property. You also reduce any estate tax due if you own the property when you die. For those landowners for whom the estate tax may be an issue for their heirs, the estate tax savings available from conservation easements are dramatic. This is in part because of the additional estate tax savings under what is called 2031(c) of the tax code. Please see Exhibit A entitled: Conservation Easement Estate Tax Reductions and Exhibit B: Exclusions and Conservation Easements and Estate Taxes Section 2031(c) of the Tax Code for details.
- Property Tax Savings: In Pennsylvania land subject to a conservation easement is entitled to a lower real estate tax assessment to reflect the restrictions of the easement. This can result in a substantial local property tax savings. Note that if your property is already under Act 319 you can petition to have your land reassessed once the easement is in place, but most likely your taxes are as low as possible under Act 319 and there is no double dipping. For specific questions about your tax assessment following a conservation easement contact Cheryl Pringle at the Tax Assessment Office # 610-344-6134.
If you are interested in preserving your land, have questions about how tax incentives work or would like to hear about TLC’s landowner conservation financing options, contact Gwen Lacy, Executive Director at 610-347-0347 ext 107 or firstname.lastname@example.org