Conservation easements – A tool for reducing income taxes

 
 
 
 
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Landowners have numerous reasons for choosing to protect their land with a conservation easement. For many, they have an overarching love for the land and want to ensure it remains intact and healthy. The idea of leaving a family legacy that can be cherished by kids and grandkids, etc. is also a major concern. For others, they are motivated by the idea of their land forever being a critical part of a regional network of springs and streams, caves, habitat or scenic vistas.

However, these reasons alone may not be enough for some. Thankfully, there are good financial reasons to consider a conservation easement. For instance, a conservation easement may yield a significant federal income tax deduction. With a conservation easement, a landowner chooses to limit the future development potential of their land. Given that the “highest and best use” of the land assumes it is fully developed, that development potential is bound up in its real estate value. However, many landowners have no desire to develop the land, so that bound-up value does not benefit them. Thankfully, placing a conservation easement on the property reduces its value according to the amount of development potential they choose to forgo, and this may yield related tax benefits.

For a “qualified conservation contribution”, including conservation easements, the landowner may take a federal income tax deduction equal to the value of forgone development potential. The development potential of a rural property, which is equal to the value of the conservation easement, might be valued at anywhere from approximately 20% to 80% of the total (i.e., “fee”) value of the land. As an example, and for the sake of easy math, assume the conservation easement value is 40% of the total value of a $1,000,000 property – The conservation easement is worth $400,000 and the remaining value of the land is $600,000. If the landowner makes a qualified conservation contribution in the form of a conservation easement, they can take a tax deduction on up to $400,000 as a result of voluntarily limiting the land’s development potential.

Moreover, in December 2015, Congress made permanent the “enhanced” conservation easement tax incentive, which allows donors of qualified conservation contributions to take a deduction on up to 50% of their adjusted gross income, and carry any unused deduction forward for up to fifteen years. This provides a greater opportunity each year, and for a longer term, to make use of the charitable donation.

The reduction in property value can also yield estate tax benefits for many landowners as well. In short, a conservation easement may mean the difference between keeping the land and selling it to the highest bidder.

Before engaging in a conservation easement transaction, landowners are advised to discuss with their accountant and attorney whether a conservation easement might be of help. More information on the income tax benefits of conservation easements can be found at the following links: