Protect your land and get a deduction

January 27, 2017

By Josh Miller, CPA
Tax Manager

Over the past decade, conservation easements have been a widespread topic of conversation among farmers, ranchers and other major land owners. Why? In 2006, Congress passed legislation that used favorable tax treatment to motivate individuals to donate conservation easements. This voluntary legal agreement between a landowner and a land trust or government agency permanently limits the use of the land to protect its conservation values (defined as either protection of the relatively natural habitat of fish, wildlife, plants, or other similar ecosystem or preservation of open space for the scenic enjoyment of the general public). In addition to the major tax incentive, these donations have become so popular because they allow a land owner to maintain ownership of the land and, in the case of farmers and ranchers, continue to use the land in business.

The tax incentives for conservation easement donations to charity are a 50%-of-Adjusted Gross Income (AGI) limit for qualified contributions, a 100%-of-AGI limit for qualified farmers and ranchers, as well as a 15-year carryover period. This compared to the typical 30%-of-AGI limit with a five-year carryover period for contributions of other capital gain property. These easements may also result in property tax savings for the owner. While individuals have been making these conservation easements for some time, there is now a greater sense of security in planning for these contributions and their value because Congress made these tax incentives permanent.

The value of these easements varies greatly. The highest values are typically found on tracts of open space under high development pressure. The valuation of a conservation easement is typically done with a “before and after” approach. The value of the easement is equal to the difference between the unencumbered value of the property immediately before the easement and the value of the property immediately after the conservation easement has restricted the property’s use.

Similar to any donation of property, these conservation easements are scrutinized by the IRS. Appraisals, paperwork and deeds all need to verified and in a tight 60-day window. Here are some examples of recent denials by the IRS:

• Contribution denied when land was subject to a mortgage at the time of contribution

• Contribution denied because a timely qualified appraisal was not provided and the deed was not recorded within 60 days of the appraisal

• Contribution denied because language did not provide a clear proportional interest in sale proceeds to the charity in the event the easement was extinguished

Because of the stringent requirements to claim this deduction and the typically large size of such a donation, you must involve your accountant throughout the gifting process and have all paperwork, appraisals and proof of timely recorded deed on file. Failure to do so can easily result in a denial of the charitable contribution by the IRS after you’ve already permanently restricted the use of your land.

For more information or assistance on tax planning and preparation, call 888-556-0123, email info@honkamp.com or submit our online form.