There are several distinct tax advantages to executing a conservation easement, especially if you donate all or a portion of the easement’s value. While we cannot offer individual tax advice, below is a general summary of these benefits:
Tax advantages of easement donation or bargain sale
The donation of a conservation easement is considered a charitable contribution and so is eligible for a federal income tax deduction.
Most Land Conservancy easement purchases are on a bargain sale basis, which means that the purchase price is only a portion of the appraised easement value. The remaining value is considered a donation and may be eligible for a federal income tax deduction. (Please note that proceeds of easement sales received by the landowner are taxable.)
How is the value of the conservation easement determined?
The qualified appraiser determines the value of the land at its market (development) value and then at its value using the development and subdivision restrictions of the easement. The difference between the two is the value of the easement, which is also considered the value of the contribution to the Land Conservancy when the easement is donated.
EXAMPLE: John and Mary Smith own a 50-acre farm.
Market value per acre is $5000 x 50 acres = $250,000
Restricted use value per acre is $3000 x 50 acres = $150,000
Market value ($250,000) – Restricted use value ($150,000) = Easement Value ($100,000)
How is the charitable contribution deducted?
Determine the adjusted gross income figure of the property owner(s). On an annual basis, all or a portion of the charitable contribution in an amount not to exceed 50% of the adjusted gross income may be claimed as a deduction. For farmers, a tax deduction may be taken for up to 100% of the adjusted gross income, zeroing out any potential income taxes to be paid.
Any remaining balance of the contribution may be deducted based on this formula for another 15 years. Any balance not used by the 16th year is lost.
EXAMPLE: John and Mary Smith’s farm has an Easement Value of $100,000. Their adjusted gross income is $30,000.
Year 1: Adjusted gross income ($30,000) x 50% = amount of deduction ($15,000)
The landowners are taxed on only $15,000 income instead of $30,000!
Easement Donation Value: $100,000 less $15,000 = $85,000
Years 2+: Each year, the Smiths use $15,000 of the remaining charitable deduction, until it is used up in the 7th year.
Federal income tax deductions
The IRS has specific requirements for reporting on and determining the value of gifts of property valued at more than $5,000 (which includes most donations of land or conservation easements to land trusts). Gifts of property in excess of $5,000 must meet the following requirements:
The Grantor must obtain a written qualified appraisal no earlier than 60 days before the date of the gift (easement) and must state the fair market value as of the date of the contribution. The appraisal is the responsibility of the donor, not the land trust.
A qualified appraiser must prepare the appraisal. Generally, a qualified appraiser cannot be the Grantor, the Grantee, a party to the transaction in which the donor acquired the property, employed by or related to any of the foregoing persons, or any person whose relationship to the taxpayer would cause a reasonable person to question the appraiser’s independence. An appraiser who is regularly retained by any of the above and who does not perform a majority of his or her yearly appraisals for other people is not a qualified appraiser. The appraisal fee must not be based on a percentage of the appraised value of the property. Appraisals of land, especially land with subdivision potential, are substantially different from typical residential property appraisals. You should use a state-licensed or state-certified appraiser who follows the Uniform Standards of Professional Appraisal Practice (USPAP).
An Appraisal Summary (IRS Form 8283), signed by the appraiser and the Grantee, must be attached to the Federal income tax return on which the deduction for the contribution is first claimed. The form, provided by the IRS, asks for information required by Treasury Department regulations.
For charitable donations of property valued at more than $500,000, the Grantor must include the full, unabridged appraisal with their tax return.
If you have questions, please call the Land Conservancy at (717) 334-2828.