If you own land with important natural or historic resources, donating a voluntary conservation easement (also called conservation agreement) can be one of the smartest ways to conserve the land you love, while maintaining your private property rights and possibly realizing significant federal tax benefits.
Federal law allows the following income tax benefits for conservation easement donations:
- An income tax deduction of up to 50 percent of the donor’s AGI income — or for qualifying farmers and ranchers, up to 100 percent of their income;
- A 15-year carry-forward period in which a donor can claim tax deductions. If you cannot use your full deduction in the first year because of the income limit, you can continue to claim the deduction the next year, and the next, until the full deduction is used (for a maximum of 15 years).
This helps modest-income donors receive greater credit for donating a conservation easement on property they own.
of the impact of this tax incentive:
A landowner earning $50,000 a year (AGI) who donated a conservation easement appraised at $1 million can deduct $25,000 for the year of the donation and then for an additional 15 years. That’s a total of $400,000 in deductions.
If the landowner qualifies as a farmer or rancher, he or she could deduct their full income annually, raising the deduction to $800,000 for the million dollar gift.
It is never possible to deduct more than the fair market value of the gift.
***Federal Tax Law Changes
Changes to the tax laws in 2018 have effected federal deductibility of donations when used in conjunction with the Iowa Conservation Tax Credit. The new federal rules require the federal deduction be reduced by the amount claimed for a state tax credit. As an example, a gift value of $200,000, would result in $100,000 state tax credit and qualify for $100,000 in federal tax deductions. And for another example, a gift value of $300,000 would result in $100,000 state tax credit (capped at $100,000) and $200,000 in federal deduction. There are additional nuisances that may be applicable depending on the gift and so donors are HIGHLY encouraged to discuss the tax impact with their tax preparer.
What other restrictions apply?
- Conservation easements must meet the “conservation purposes” test defined in the existing federal law.
- They cannot be donated as part of a “quid pro quo” agreement where the easement was given in exchange for something else, such as a building permit.
- They must be donated to a qualified organization — a governmental unit or a publicly supported charity that has “a commitment to protect the conservation purposes of the donation, and…the resources to enforce the restrictions.”
Do these changes apply to gifts of land?
This expanded incentive does not apply to gifts of land in fee; it only applies to gifts that qualify under IRC 170(h)(2), such as conservation easements.
Who qualifies for the additional incentives for farmers and ranchers?
The law defines a farmer or rancher as someone who receives more than 50 percent of his or her gross income from “the trade or business of farming.” The law references Internal Revenue Code (IRC) 2032A(e)(5) to define activities that count as farming. Specifically, those activities include:
- Cultivating the soil or raising or harvesting any agricultural or horticultural commodity (including the raising, shearing, feeding, caring for, training, and management of animals) on a farm;
- handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of the commodity so treated; and
- the planting, cultivating, caring for, or cutting of trees, or the preparation (other than milling) of trees for market.
For an easement to qualify for the additional benefits to farmers and ranchers, it must contain a restriction requiring that the land remain “available for agriculture.” The qualified farmer or rancher provision also applies to farmers who are organized as C corporations.
Will donors who use this provision be audited?
Claiming this enhanced deduction will not necessarily affect one’s likelihood of being audited. All donors should note, however, that the IRS does pay attention to high value donations of property—including donations of conservation easements.
That makes it particularly important for donors and their advisers to know and follow the law; to utilize a reputable professional appraiser who has experience in the appraisal of conservation easements; to maintain good records and properly claim the deduction; and to donate to a well-established, reputable land trust that has adopted and implemented Land Trust Standards and Practices. Learn more about Tax Basics.
Other rules affecting easement donors
PL109-280 defines who is a “qualified appraiser.” Appraisers need to show donors that they are qualified under the law, which states that a qualified appraiser must “demonstrate verifiable education and experience in valuing the type of property subject to the appraisal.”
Choosing an easement partner
Donating a conservation easement requires a working partnership with a nonprofit land trust or a conservation agency, which accepts the responsibility to annually monitor the future use of the easement land in perpetuity and ensure that the easement protections are being honored.
Landowners should understand that a land trust or agency may decline to accept a donation that does not meet both the legal requirements and the land trust’s own specific charitable mission and strategic plan. Also, they may want to see the appraisal before accepting your gift.
How can INHF help?
As an experienced land trust, INHF can walk with you and your professional advisers through the easement process. We can help you identify organizations and agencies that might hold your easement, and in many cases INHF holds easements. Please remember that time is needed for careful drafting of documents and maps, baseline documentation and a professional appraisal.