IntroductionTax incentives help many landowners take advantage of conservation opportunities. The potential tax benefits of a donated conservation easement are twofold. First, income tax benefits may accrue at the federal level. Second, the conservation easement works as an estate planning tool to reduce estate tax liability by allowing family property to be passed from generation to generation with the potential of a substantially lower tax burden.
Qualifying for a Tax DeductionTo qualify for a tax deduction, your donation must be considered a charitable gift by the Internal Revenue Service. To determine whether your gift meets IRS requirements, it is best to review the proposed gift with an experienced attorney or accountant. A deductible, charitable donation can be made only to an IRS-qualified, tax-exempt organization. It must be considered a true gift motivated by a charitable intent and not granted as a requirement for getting something in return. For example, a conservation easement donated by a developer, in exchange for government approval of a subdivision, is not considered a gift. A gift must also be complete and irrevocable, without strings or contingencies.
Quantifying the Tax DeductionFor tax deductions on gifts worth more than $5,000 (other than cash and publicly traded securities), landowners must obtain a "qualified appraisal" by a "qualified appraiser." Please see our list of appraisers on our links page. You should consult with a professional appraiser who has direct experience with charitable gifts or easements. Texas Land Conservancy (TLC) cannot provide the appraisal. The appraisal cost is a necessary expense if you wish to pursue a charitable tax deduction. Contribution ValueContribution value is the difference of the total market value of your property and the appraised value of your property with a conservation easement. This is the amount that is considered your charitable donation and is, thereby, tax deductible.
The appraised value is comprised of multiple aspects that an appraiser must take into account such as:
1. Sales of comparable properties already under conservation easement2. Data on the sale of developed and undeveloped comparable properties3. Information on appraised values of other conservation easements 4. Specific terms of your conservation easement.
How Easement Deduction WorksIn our example, the value of the charitable contribution generated through the donation of the conservation easement is $1,500,000. Let's assume that the landowner's annual AGI is $250,000, which remains constant. The deduction resulting from the easement is as follows: (50 percent of $250,000 = $125,000). The actual tax reduction is a function of your income tax bracket.
Deductibility of Easement CostsSome of the costs incurred in making a charitable contribution are also deductible. Fees and costs associated with compilation of the "Baseline Documentation Report" or the Appraisal can generally be deducted as business expenses if, in combination with other miscellaneous deductions, they exceed 2 percent of your adjusted gross income. Any cash or securities given to endow stewardship of a conserved property are considered charitable contributions.
Estate Tax - Succession PlanningFederal estate taxes are based on the fair market value of the property at the time of the landowner's death, not the original purchase price or current use value. This can be a significant and potentially debilitating tax burden for farm and ranch families whose land values have appreciated over time, particularly if the appreciated value is due largely to increased development value. Sometimes caught unaware and without the benefit of estate planning, ranch families may have to subdivide and sell some of their land just to meet the estate tax obligations. Conservation easements can be a useful estate planning tool to reduce estate tax liability and allow ranches to remain in the family.
Estate PlanningConservation easements are only one component of several estate planning options available to effectively pass on a ranch or farm, as well as other assets, to the next generation. Proper planning with a qualified estate planning team is essential to maximize the benefits of available estate tax exclusions.