Tax Benefits of Conservation Easements

Landowners are urged to engage their own legal and financial advisors when considering a conservation easement donation. Valley Conservation Council and our staff members are not qualified to provide legal or tax advice. We are happy to help you understand how easements work and would be glad to sit down and discuss any aspect, but you should have your own trusted counselors and consider these matters in light of your longterm plans for your land and your financial future.

Note: As of February 2010, Congress has yet to pass legislation that would continue the expanded federal incentives outlined below that we put in place for 2008 and 2009. We hope these will be passed soon and that qualifying easements recorded in 2010 will have these same benefits, but we can make no guarantees about what Congress will do.

At the state level, the tax credit program currently stands at 40% of the easement value. There are bills in the General Assembly that might raise this back to 50% for certain lands if passed. Landowners can use tax credits against their tax liability up to $50,000 per year (previously $100,000 per year.)

There are books written on this topic--not very exciting books, we admit--but we hope the short explanation below will help you understand some of the basics of this important aspect of easement donations. People who want to conserve their land are often pleasantly surprised that they may qualify for significant tax benefits. People seeking to make the most possible money off of their land may be disappointed.

Easements are first and foremost about what's good for the land. They can not compete with the sort of revenue someone would get for selling off their property for development; however, we urge landowners to run the numbers as they may well find that an easement lets them keep their land the way they like it while also recovering substantial amounts of the equity they have in it.

VCC does not provide tax advice. Please consult with your tax advisor, financial planner or attorney about qualifying and for and using any tax benefits associated with conservation easements.

A qualified gift of a conservation easement given in perpetuity may qualify as a non-cash charitable gift that will likely yield a deduction from federal income tax and a credit for Virginia state income tax purposes. There may also be local property tax reductions and federal estate tax exemptions. An independent certified appraiser must establish the value of the conservation easement, which is the difference between the property with and without its development rights. Once that value is established, it is the basis for calculating tax benefits.

1. Federal Charitable gift deduction. Section 170(h) of the IRS Code establishes the criteria for a “qualified gift of a conservation easement.” For this deduction, tax form 8283 is used as a qualified conservation easement is considered a gift of real estate. Note: the following will not be in effect unless Congress passes legislation extending these benefits into 2010: The deduction is limited to 50% of adjusted gross income in the year of the gift, which if not used up, may be carried forward for fifteen additional years. Qualified farmers (who receive more than 50% of their income from farming) may deduct up to 100% of their adjusted gross income each year. The tax form is completed by the appraiser, which includes the easement valuation, and signed by the easement holder to acknowledge the gift. These tax benefits currently apply to 2008 and 2009 only. (After 2009, unless Congress passes new legislation, the deduction will revert to 30% of the donor's adjusted gross income, carried forward over five years. The expanded benefit for farmers and ranchers is also part of this legislation.)

1. Virginia State Tax Credit. A Virginia State tax credit has been established for conservation easements at 40% of the value of the easement. This credit can be used at a rate of up to $50,000 per year against state income tax liability and can be carried forward for ten years. Any unused portion may be transferred to another Virginia taxpayer. (see Code of Virginia, Sec. 58.1-510 through 513). In Virginia, it is possible for landowners or brokers to sell unused tax credits for cash. This means that a landowner who donates a conservation easement and cannot use all of their Virginia tax credits may receive cash for a portion of the value of their easement. Transferred credits are subject to a 2% (maximum $10,000) transfer fee.

1. Federal Estate Tax Exemption. Section 2031(c) “The Farm and Ranch Protection Act” allows that up to 40% of the value of land under conservation easement may by exempt from estate taxes, depending on appraised value (i.e. an exemption is reduced if appraisal is less than 30% of the property value) and subject to a $500,000 cap for an individual (or one $million for a couple with proper estate planning). Read more about the estate tax benefits of easements.

1. Local Property Taxes may be reduced (see Code of Virginia 10.1-1011 and 58.1-3205), however, if land is already assessed at “use value,” in other words, enrolled in a local Land Use Assessment Taxation Program, additional reductions in taxes are unlikely.