Both the federal and state governments have equipped landowners with the tools to preserve their property and receive significant tax benefits. The Conservation Easement Tax Incentive is a promoter for landowners who want to preserve their property, but who also want to offset income with significant tax deduction. Under the Internal Revenue Code, a conservation easement donor can deduct the value of a qualified conservation easement, up to 30% of the donor’s adjusted gross income per year, with a five (5) year carry-forward of any unused amount.1 The Conservation Easement Tax Incentive sweetens the deal by allowing donors to deduct up to 50% of their adjusted gross income and extending the carry-forward period from five (5) years to fifteen (15) years. Unfortunately, this incentive is set to expire in 2013 unless Congress extends the time period or passes the “Conservation Easement Incentive Act of 2013,”2 which makes the incentive permanent.
A conservation easement is a voluntary and unique agreement between a landowner and a qualified conservation organization. The agreement restricts particular development and uses on a landowner’s property in order to permanently preserve significant environmental resources.
On Long Island, and especially in Nassau County, where overdevelopment is causing detrimental effects to our surface waters and groundwater, the preservation of open space is the most effective tool for offsetting increased development. When property is left in its natural state, it provides a buffer to prevent stormwater run-off from entering our waterways. Natural buffers soak up run-off and filter out impurities from fertilizers, and other harmful pollutants that would otherwise enter our ground and surface waters.
While there has been some push by local governments to purchase open space, recent economic downturns have defunding these programs and left our remaining open spaces vulnerable to unsustainable development. The Conservation Easement Tax Incentive allows private landowners who love their property but are concerned about overdevelopment and the health of future generations, to permanently protect their land while enjoying significant tax benefits. On Long Island, where property values are high, this deduction can result in significant tax savings.
Federal Tax Benefits
In 2006, through the Pension Protection Act,3 Congress encouraged the donation of conservation easements by increasing the deduction from 30% to 50%, and extending the carry-forward period from five years to fifteen. This incentive widens the taxpayers that could benefit from the donation. While this incentive has help preserve thousands of acres across the country, the law sunsets periodically and is scheduled to sunset once again on December 31, 2013.
The federal tax benefits are depicted in the following example. A donor with an Adjusted Gross Income (AGI) of $500,000 who donates an easement with a conservation value of $3,500,0004 could deduct $250,000 (50% of AGI) each year for a total of 13 years. This deduction could create significant federal income tax savings for landowners with income.
New York State Tax Credit
In addition to the federal tax benefits for donating a conservation easement, there is also an annual New York State tax credit that is worth mentioning. This credit offers New York taxpayers whose land is restricted by a conservation easement an annual state income tax credit of up to 25% of the school district, county and town real estate taxes paid on the restricted land, up to an annual maximum of $5,000 per taxpayer.
In order to qualify for this credit the easement must be voluntarily donated and comply with the requirements of IRC § 170(h). Moreover, the easement must be filed with the Department of Environmental Conservation.
Finally, unlike the federal deduction, this credit applies to easements donated prior to the 2006 enactment of the credit and stays with the property. In other words, future owners of the property would benefit from the qualified easement even though they did not donate the easement.
There are a few things to think about when discussing an easement donation with a client, as the IRC has specific requirements when seeking a charitable income tax deduction for donating a conservation easement. These requirements can be found in IRC § 170(h).
The IRC provides the donor of a “qualified conservation contribution”5 to a “qualified organization”6 exclusively for “conservation purposes”7 is entitled to a deduction. According to the IRC, a conservation easement is a qualified conservation interest when the conservation easement is granted in perpetuity.8 While this requirement is daunting to many landowners, it should be noted that conservation easements can be tailored to accommodate a landowner’s current and future needs.
For example, if the landowner anticipates subdividing out two lots in the future in order to give to each of his two children that right can be written into the easement. Does the landowner want to add a pool down the road? Or what about an addition to their existing house? All of these things should be considered and discussed with the landowner prior to entering into the easement, keeping in mind that the more rights reserved for the landowner the less the conservation easement value.
Also important are the conservation values of the property that are being preserved. The IRS looks to this in establishing the purpose of the easement. The IRC defines what a qualifying purpose is. According to Section 170(h)(4), qualifying purpose can be described in four separate categories generally: (1) outdoor recreation or education for the general public; (2) protection of a relatively natural habitat; (3) the preservation of open space; or (4) the preservation of historically important land or certified historic structure.
When drafting conservation easement agreements, the “qualified purpose” should be clearly stated. Many landowners mistakenly think that donating a conservation easement over their property will open their land to the public. This is not usually the case. Most easements do not require public access, and actually granting public access may be an infringement of the conservation purposes, such as protection of a specific natural habitat.
Other matters to consider when contemplating a conservation easement are the value of the conservation easement. The IRS requires that the value of the easement be established by a “qualified appraisal”9 which shall be conducted by a “qualified appraiser.”10 A qualified appraisal, among other things, must include a description of the property and the method of valuation used to determine the fair market value.
It should be noted that the appraisal cannot be completed more than 60 days prior to the date of the gift and must be completed no later than the due date for the landowner’s federal tax return for the year in which the gift was made. Form 8283 needs to be signed by the appraiser to support the donation by the landowner and should be submitted with the appraisal.
Also, when contemplating an easement donation, any mortgages on the property will need to be subordinated to the easement in order to protect the perpetuity requirements of the deduction. Treasury Regulation Section 1.170A–14(g)(2) states that “no deduction will be permitted … for an interest in property which is subject to a mortgage unless the mortgagee subordinates its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.”
The Conservation Easement Incentive and the New York State tax credit are valuable tools available to landowners looking to protect the conservation values of their property while simultaneously receiving significant tax benefits from the donation. As each landowner’s situation is unique, the landowner’s advisors should thoroughly review any future uses or development on the property. Also, it is important that the strict requirements are adhered to when donating an easement because the IRS may deny the deduction.
Elizabeth Baldwin is the Associate Director and Counsel for the North Shore Land Alliance, a not-for-profit land trust located in Old Westbury. For more information regarding conservation easement donation or the North Shore Land Alliance, contact the Land Alliance at (516) 626-0908 or e-mail Beth at email@example.com.
1. IRC §170
2. H.R. 2807.
3. The enhanced incentive was created in the 2006 Pension Protection Act, extended through 2009 in the 2008 Farm Bill, through 2011 by section 723 of H.R. 4853, and through 2013 by section 206 of H.R. 8.
4. Conservation Value is determined by determining the value of the entire property and deducting the value of the property with easement. The difference between the two values is the conservation value. For example, a property with an appraised value of $5,000,000 who donates a conservation easement thereby reducing the appraised property value to $1,500,000 has a Conservation Easement Value of $3,500,000.
5. IRC § 170(h)(1).
6. IRC § 170(h)(3).
7. IRC § 170(h)(4).
8. IRC § 170(h)(2)(C).
9. IRC § 170(f)(11)(E)(i).
10. IRC § 170(f)(11)(E)(ii).
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