Qualified conservation easements are becoming an increasingly popular way to save on your tax bill, but what exactly is a conservation easement, and what do you need to know to capitalize on this opportunity?
Simply put, a conservation easement is “a restriction placed on a piece of property to protect its associated resources.” To reap the tax benefits from a conservation easement, the landowner must gift an interest in his or her qualified real property to a public agency or qualifying 501(c)(3) organization. The gift must meet four criteria to constitute a qualified conservation contribution:
Essentially, the landowner retains ownership of the property, and can continue to live on the property for generations, but the conservation easement contribution permanently eliminates any developmental rights. This permanency is desirable to some, but could be problematic for future generations if ecological conditions or personal intentions change. However, the deduction associated with a conservation easement can be significant, and many feel the tax benefits outweigh the negative aspects.
Tax incentives, such as both federal income and estate tax deductions, can be other “positives” associated with conservation easements. Under the Internal Revenue Code, conservation easements are considered charitable donations. Landowners can deduct the value of the easements, with the value generally calculated as the difference between the fair value of the land before the easement is granted, and the value of the land after the grant. There are some limitations on the amount of deduction one can take, but generally this deduction results in large tax savings.
Reduction in, and sometimes relief from, estate taxes can be another significant incentive. When the conservation easement lowers the property value of the estate to be taxed, the estate tax will be calculated on a lesser amount, so the estate will owe less in taxes. Another estate tax benefit comes from allowing heirs to exclude 40% of the value of the property remaining after the granting of the easement from the estate. This exclusion is capped, and there are other restrictions, but together these two incentives could significantly reduce the taxpayer’s estate tax liability.
There are specific rules relating to what qualifies as a “gift” of an interest in property, and limitations regarding to which organizations the property may be gifted. However, once the gift is made, it needs to be valued correctly, and disclosures must be made to accurately record the contribution. In order for the donor to take a deduction, he or she must obtain and attach a qualified appraisal to his or her income tax return, along with a signed copy of Form 8283, “Noncash Charitable Contributions.” In addition, the taxpayer must file with the return, Form 8886, “Reportable Transaction Disclosure Statement,” to provide the IRS with specific information regarding the donated property.
While this article has highlighted merely a few, there are many aspects and tax benefits associated with conservation easements. If you are interested in learning more about the tax benefits of conservation easements and what you should know about purchasing an easement, or would like to request a speaker on this topic for your organization or event, contact one of our PYA executives below at (800) 270-9629.