Conservation Easement Tax Incentive Guide.pdf

A conservation easement is a voluntary and legally binding agreement between a landowner and a land trust or government agency. It permanently limits uses of the donated parcel in order to protect its conservation values. The easement may apply to all or a portion of the property and may or may not allow for public access to the property. A landowner who has donated a conservation easement can sell the land or pass it on to heirs, and future owners of the property are bound by the terms of the easement.

The permanent, enhanced tax incentive allows landowners to deduct up to 50% of their annual income for donating a conservation easement, up from 30%. The incentive also extends the carry-forward period for a donor to take a tax deduction for a conservation agreement to 15 years from 5 years. Qualifying farmers and ranchers can deduct up to 100% of their income, increased from 50%.

Easements vary greatly in value, with the highest values found on tracts of open space under high development pressure. Placing an easement on one's land may also result in property tax savings for the landowner.

The permanent incentive provides significant financial benefits to landowners. For example, a landowner earning $50,000 a year who donated a $1 million conservation easement could deduct $25,000 (50% of income) for the year of the donation and for each of an additional 15 years, generating a total of $400,000 in deductions. If the landowner is a farmer or rancher, he or she can deduct $50,000 (100% of income) in the first year and then for each of the following 15 years, realizing a maximum of $800,000 in deductions.

The 2015 law defines a farmer or rancher as someone who receives more than 50% of his or her gross income from the trade or business of farming. The law references IRC 2032A(e)(5) to define activities that count as farming, including cultivating the soil, raising or harvesting agricultural or horticultural commodities, and handling, drying, packing, grading, or storing agricultural or horticultural commodities on a farm.

The 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. A landowner considering the donation of land should consult an attorney to determine whether the structure of his or her gift should be changed to take advantage of the permanent incentive.

The permanent incentive applies to all conservation easements donated after December 31, 2014. Conservation easement donations must comply with "conservation purposes" as defined in IRC 170(h). A donated easement must be a true gift, protect significant natural, agricultural or historic resources, and not serve to simply prevent development on a property or be part of a "quid pro quo" agreement in exchange for a government action.

Donors who use this provision should not be affected in their likelihood of being audited by the IRS. However, all donors should note that the IRS does pay attention to donations of property that are high in value, including donations of conservation easements. This makes it important for donors and their advisors to know and follow the law, utilize a reputable professional appraiser who has experience in the appraisal of conservation easements, and donate to a well-established, reputable land trust that has adopted and implemented Land Trust Standards and Practices.