Federal Tax Incentives for Conservation

Income Tax Deduction

 The donation of a conservation easement is a tax-deductible charitable gift, provided that the easement is perpetual and is donated “exclusively for conservation purposes” to a public agency or qualified conservation organization, such as the BCRLT.  Internal Revenue Code Section 170(h) generally defines “conservation purposes” to include the following:

• The preservation of land areas for outdoor recreation by, or the education of, the general public.
• The protection of relatively natural habitats of fish, wildlife, or plants and high-quality natural communities.
• The preservation of open space - including farmland and forest land - for scenic enjoyment or pursuant to an adopted governmental conservation policy; in either case, such open space preservation must yield a significant public benefit.
• The preservation of historically important areas or buildings.
  
  

To determine the value of the easement donation, the owner will have the property appraised both at its fair market value without the easement restrictions, and at its fair market value with the easement restrictions.  The difference between these two appraised values is the easement value.  Detailed federal regulations govern these appraisals.

For example:  A property is appraised at fair market value for $100,000.  Mr. Price, the landowner, donates a conservation easement to the BCRLT.  The easement reduces the property’s market value to $25,000, establishing the value of the easement at $75,000.  Assuming the easement meets the tax conservation purposes test, Mr. Price is eligible to deduct an amount up to 50 percent of his adjusted gross income each year for a total of sixteen years until the value of the gift is exhausted.  If Mr. Price has an annual adjusted gross income of $50,000, he can deduct $25,000 a year (50% of $50,000) until he has exhausted the $75,000 of the charitable gift.  In this example, Mr. Price will exhaust his gift in a three-year period, if his income does not change.

Estate Tax Benefits

Federal estate tax is levied against property and possessions at the time of death.  Many heirs to large tracts of open space (farms and ranches in particular) can face monumental estate tax bills when those properties pass from one generation to the next.  Even if the heirs wish to keep their property in the existing condition, federal estate tax is levied not on the value of the property under its existing use, but on the fair market value of the property’s “highest and best use” (that use which brings the highest property value), which is often residential or industrial subdivision and use.  The resulting estate tax can be so high that the heirs must sell the property to pay the taxes.

A conservation easement often can reduce estate taxes.  If the property owner has restricted the property by a perpetual conservation easement before his or her death, the property will be valued for estate tax purposes at its restricted value.  To the extent that this restricted value is lower than the unrestricted value, the value of the estate will be less, and the estate will be subject to a lower estate tax.

Even if a property owner does not want to restrict a property during his or her lifetime, their will can specify that a conservation easement be donated to the BCRLT upon the owner’s death.  The value of the easement gift can then be deducted from the estate, resulting in lower estate taxes.

The above mentioned scenarios are provided as example only.  Easement donors should rely on legal counsel and professional tax advice to determine the tax consequences of a conservation easement.

BCRLT will not knowingly participate in a transaction that presents concerns about the qualifications or other aspects of a claimed tax deduction or credit.

Further Information on Federal Conservation Tax Incentives:

Land Trust Alliance - http://www.landtrustalliance.org/
Colorado Coalition of Land Trusts (CCLT) - http://www.cclt.org/cclt/