1. DONOR INCOME: The higher the income the greater the tax savings.
2. VALUE OF DONATED EASEMENT: The higher the value of the easement, the greater the tax deduction.
Tax Savings Benefits
FEDERAL TAX BENEFITS – (See Tax Saving Scenarios on page 4)
Congress recognizes that conservation easements help preserve open-space land, natural habitats, historic structures, and other property having important value to the community by allowing donors to be compensated through a tax deduction in return for property restrictions.
As a way to encourage property owners to protect the open space and natural habitats of their lands, Congress considers certain conservation easements to be tax-deductible charitable contributions. In 2006, Congress increased the federal tax benefits to conservation easement donors. While these enhanced federal tax benefits were extended by Congress, the enhanced benefits are set to expire at the end of 2013! The land trust community is lobbying to have the enhanced tax benefits made permanent.
Enhanced Tax Incentive: Donors of tax-deductible conservation easements have up to 16 years to take their income tax deduction, and can deduct up to 50% of their adjusted gross income each of those years up to the value of the donation. The value of the donation is equal to the fair market value of the property before the easement, with its development rights intact, minus the fair market value after the easement.
NEW YORK STATE TAX BENEFITS
New York State Tax Credit: There is also an annual Conservation Tax Credit in New York State for donors of conservation easements. If a landowner donates a conservation easement that meets IRS requirements, they will receive an annual state income tax credit for 25% of the property taxes on their easement-restricted land, up to $5,000 (not including city or village taxes). This tax credit is available to all owners of land with qualified conservation easements, regardless of when the easement was created, and it runs with the land so that successor owners will also benefit.
ESTATE PLANNING BENEFITS
Easements are unique in their capacity to reduce the estate tax burden on an important asset without (in many cases) significantly affecting the current use of the land or its utility to the owner’s family. There are two distinct estate tax benefits from the donation of conservation easements.
Reducing value of property included in estate: The first benefit is that the donation of an easement reduces the value of property included in an estate, so that estate tax is paid on a lower valuation. In other words, less estate tax is owed.
Exclusion benefit: 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. In order to qualify for this benefit, the decedent must have owned the property for at least three years prior to death.
Some of these economic benefits may also be realized by the beneficiaries, as a conservation easement may be placed on a property up to one year after the landowner has died. The combination of these benefits can result in a substantial reduction of the estate tax burden on this property.
There are a number of guiding principles that apply to donating a conservation easement:
- In order to be deductible for income or estate tax purposes, the donation must be made to a qualified 501(c)(3) “public charity.” The North Shore Land Alliance meets this requirement.
- The easement must be of a “qualified conservation interest” given “exclusively for conservation purposes.” A qualified interest restricts the use of the property forever. Conservation purposes include preserving land for (1) outdoor recreational use; (2) protecting relatively natural habitats of fish, wildlife or plants; (3) preserving open space (including farmland or forest space) for scenic enjoyment of the general public and providing a public benefit; and (4) preserving a historically important land area or a certified historic structure.
- Because a conservation easement will usually have a value of more than $5,000, the donor must obtain a qualified appraisal in order to claim a tax deduction. The appraisal must be prepared by an independent, qualified appraiser and must contain certain factual information specified by the IRS regulations. The donor must file a summary report (IRS Form 8283), signed by the appraiser and the Land Alliance, with the donor’s federal income tax return. For deductions valued over $500,000 the appraisal must accompany the tax return.
- If there is an existing mortgage or lien on the conserved property, the mortgage or lien must be either discharged or subordinated to the easement. This simple process requires the lender (i.e. bank) to sign off on the subordination because the easement must be enforceable in perpetuity.
TAX SAVINGS SCENARIOS
A land trust is not allowed to give legal or tax advice although we can provide potential donors with possible scenarios. Before any transaction takes place, landowners are encouraged to hire legal counsel.
Scenario 1 – Income Tax Deduction
Scenario 2 – Federal Estate Tax Benefits
Assume same facts as above, and that the value of the property with the easement remained at $4,000,000 at the time of the donor’s death.
Without Easement With Easement
Value of Land $6,300,000 $4,000,000
Other Taxable Assets $1,000,000 $1,000,000
Total Value of Estate $7,300,000 $5,000,000
Estate Tax Exemption $5,120,000 $5,120,000
Effective Taxable Estate $2,180,000 $ 0
Thanks to the careful conservation easement planning, upon the landowner’s death, the landowner’s family will pay no federal estate tax on this property. In the first two days of 2013, Congress passed a tax compromise that makes permanent the federal estate tax with an exemption of $5.12 million per individual (Please note that New York estate tax is imposed on taxable estates in excess of $1,000,000).
The information about tax benefits contained in this document is furnished as a tool to assist qualified landowners. It is provided with the understanding that the North Shore Land Alliance is not engaged in rendering legal, accounting, tax or other counsel. If legal advice or other expert assistance is required, the services of a competent professional should be sought. This document is not a substitute for legal, accounting, or tax advice and should not be relied on as such.