When it comes time to file their taxes, most Americans look to qualify for as many tax incentives as possible.
In your quest to lower your payments, did you know that you could cash in on rewards given for land conservation efforts? Not only does a conservation easement allow you to protect your land, but it also could put more money back into your pocket.
Today, we’re diving into how conservation and taxes go hand-in-hand. We’ll also discuss the process to follow to make sure your work gets the recognition it deserves.
Ready to learn more? Let’s get started.
What is a Conservation Easement?
In short, this is a legal agreement established between a landowner and a government agency or a private land conservation organization. Within it, the landowner grants the agency power to limit the use of the land to fulfill conservation purposes. To qualify, the land must include important agricultural, natural or historic resources that are important to local conservation efforts.
Though the agreement is built around privately-owned land, the use of the conservation easement must provide a public-facing benefit. A few examples include:
- Improving water quality
- Preserving farm and ranch land
- Establishing a wildlife habitat
- Establishing productive farmland
- Providing scenic vistas and views
- Creating an outdoor recreational area
- Providing an outdoor educational opportunity
- Preserving a historic property
This agreement is voluntary and you won’t give up the entirety of your rights to the land when you sign one. For instance, even if you pursue a conservation easement, you’ll still be able to perform the following actions:
- Own the land
- Use the land
- Sell the land
- Pass the land on to your heirs
You’ll work closely with your chosen land trust partner to determine the terms that are most appropriate for your situation. For instance, some might allow you to build a home on the land or grow crops on it as long as you still provide conservation value. Varying greatly in value, some of the most sought-after easements are large, open stretches of land currently sought after by developers.
What are the Tax Incentives Involved?
The idea of establishing a conservation easement on your land sounds like a beneficial step for your community, but what’s in it for you?
Turns out, quite a lot.
The U.S. government prioritizes this action and rewards it in the form of tax incentives.
The incentive was first enacted on a temporary basis in 2006. However, Congress passed an enhanced federal tax incentive in 2015 that established a permanent benefit for taxpayers donating all or a portion of their land as a conservation easement. One of the most powerful and influential steps forward for the conservation movement in more than 10 years, this legislation marked a major shift.
This permanent incentive update applies to all conservation easements donated by taxpayers after December 31, 2014. Now, it’s more attractive and attainable than ever before for Americans to protect and conserve their land voluntarily.
In addition to making the incentive permanent, the 2015 tax update also adjusted the specific regulations surrounding the law. These new adjustments include:
- Raising deductions from 30% of a taxpayer’s annual income to 50% for donating a conservation easement
- Allowing certain qualifying ranchers and farmers to deduct 100% of their annual income, an increase from 50%
- Extending each donor’s carry-forward period on a conservation agreement tax deduction from five years to 15 years
For the easement to qualify for a charitable tax deduction on your federal income tax return, it needs to meet the following conditions:
- Be voluntarily donated to a land trust or government agency
- Permanently protect conservation resources
- Benefit the public
Examples and Calculations
While we’ve discussed how a conservation easement tax deduction works, sometimes it’s easiest to see a complicated concept in simple numbers. Let’s take a look at a typical scenario that a taxpayer might encounter.
Pre-2015 Update
Prior to the 2015 tax law update, a landowner who earned $100,000 a year who donated a $500,000 conservation easement could take a $30,000 tax deduction, equal to 30% of his or her income. This would be applicable for the year of the donation, as well as an additional five-year period. In all, the total tax deductions would total $180,000.
2015 Update and Beyond
Now, the new law increases the 30% deduction rate to 50%. That means the same landowner could donate $50,000 per year, instead of $30,000.
Moreover, the carry-forward period is 15 years (not five). This brings the total tax deductions to $800,000.
The law also makes special considerations for farmers and ranchers. They can donate 100% of their income, or $100,000 using the example. Over the comprehensive 16-year timeline, this deduction becomes $1.6 million.
To qualify as a farmer or rancher, you’ll need to derive at least half (50%) of your income specifically through farming. This can include those organized as C corporations, as well as Alaska Native Corporations. In addition, the easement in question must contain a restriction that requires that the land remain available for agricultural use.
To clarify what the trade or business of farming entails, it includes these acts:
- Cultivating the soil on a farm
- Raising or harvesting a horticultural or agricultural commodity on a farm
- Planting, cultivating, caring for or cutting trees
- Preparing trees for market (not milling)
- Handling, drying, packing and storing a horticultural or agricultural commodity on a farm before it reaches a manufactured state, given that the farm operator or owner produces at least 50% of the treated commodity
One note: While numbers like these are inspiring, it’s important to take into consideration the full market value of your land. You won’t be able to donate more than this amount, though the portion of it you can apply is now higher.
Not sure about the fair market value of your land? A qualified appraisal will give you the answers you need. The Appraisal Institute provides a full list of nationwide appraisers specially trained to appraise conservation easements, in particular.
Before a conservation easement can qualify for a tax deduction, it will need to pass a rigorous review, and an appraisal is an important part of this process. In addition, your land trust agency will want to prepare and review documents, maps and baseline documentation before making a decision.
Special Legal Considerations
As the conservation easement tax benefits can be significant for many landowners, it might come as no surprise that some less-than-honest individuals have tried to cash in on the reward unfairly.
Since its inception, the law has been under intense scrutiny as Congress cracks down on real estate tax-sheltering schemes. The most damaging are those that inflate the valuation of certain land parcels slated to be made into conservation easements.
To avoid falling prey to this type of fraud, it’s critical to do your due diligence.
Always partner with a qualified appraiser, as well as a reputable and verified real estate or trust agent. If the value you receive back for your property seems abnormally high, it will likely send up flags at the IRS, too. This can increase your odds of an audit, so always get another professional opinion on what your land is really worth.
If you do find yourself entangled in an IRS tax scheme, don’t panic. We’re trained to handle these types of cases and we can help you successfully navigate your way through the investigation process.
State-Based Tax Incentives
In addition to federal tax incentives, landowners in some states could also reap a state-based payout for establishing a conservation easement.
To date, 15 states currently offer this program, including:
-
- Arkansas
- California
- Colorado
- Connecticut
- Delaware
- Georgia
- Iowa
- Maryland
- Massachusetts
- Mississippi
- New Mexico
- New York
- North Carolina
- South Carolina
- Virginia
If you’re a legal resident of any of these, you could qualify for a state income tax credit. In most cases, these credits extend to both fee-simple land donations and conservation easements, alike.
If you live in Colorado, Georgia, New Mexico, South Carolina or Virginia, you’re especially well-positioned to take advantage of this opportunity. In these states, landowners who establish a conservation easement can take advantage of transferrable tax credits.
What does this mean? Say you don’t owe enough on your state income taxes to use the full credit you’re due. In that case, you could sell the extra credit to another local taxpayer for a fee. This is a quick and simple way to earn income, given that you know how the law works.
Help Your Conservation Easement Work For You
Ultimately, a conservation easement should be a gift given with pure intention. The goal is to preserve and protect undeveloped land to the greatest extent possible, and you can play a big role in this endeavor.
Yet, it never hurts to consider the financial reward of taking this step.
If you’re ready to learn more about how this approach works and what kind of tax-related benefits you could obtain, we’re here to help.
We’re experienced tax attorneys qualified and trained on the full extent of the law, including regulations on conservation measures. Contact us today to learn more about what we do and how we can make this tax year your best one yet.
