Potential Tax Benefits of making a conservation gift

Most landowners donate conservation easements or land to the Natural Heritage Land Trust because of their deep connection to the land and wish to see that land preserved for future generations. However, the tax benefits of conserving land can be substantial. Leaving a priceless legacy can benefit both the land and the landowner.

Here is a brief summary of issues that conservation-minded landowners might want to consider as they make financial and estate plans. Tax law changes frequently and this information is a representation of potential benefits. Anyone considering making a conservation gift should consult an attorney or tax planner for more complete and current details about these tax benefits.

1. Work with a qualified organization – The conservation easement must be granted to a qualified non-profit conservation organization, like the Natural Heritage Land Trust. New IRS Regulations also state that the recipient organization “must have the resources to…monitor and enforce” the easement restrictions.
   
   
2. Donations made for conservation purposes – A conservation easement must be granted exclusively for conservation purposes. This can mean preservation of natural habitats or resource lands, historic sites, scenic landscapes, wildlife corridors, areas for public education or recreation, or open spaces.
   
   
3. Agreement must have permanence – The easement must be granted in perpetuity.
   
   
4. Calculate the deduction accurately – The allowable deduction for a donated conservation easement is the difference between the property’s appraised value before the easement is granted and its value after the easement’s restrictions take effect.
   
   
5. Secure the proper appraisal – The appraisal to determine the easement value must meet strict federal substantiation requirements as specified in federal tax law regarding conservation easements.
   
   
6. Complete IRS Form 8283 – The conservation easement donor must complete Form 8283 including the value of the donation, and ask the recipient organization to sign the form to acknowledge receipt of the easement. The Natural Heritage Land Trust will not sign an incomplete or blank Form 8283, and will ask to see the landowner’s appraisal before signing the form.
   
   In December 2005, the IRS released a revised Form 8283 with new instructions that require the donor to include documentation of the conservation purposes, as defined by the IRS, of the easement; show fair market value of the property before and after the easement; indicate whether the easement was required for zoning or permitting purposes; and list any interest in nearby property held by the donor or related individuals.
   
   
7. Bargain sales – When donations are made in the form of a bargain sale, the landowner sells the conservation easement for less than its fair market value. The difference between the fair market value and the sale price would be the basis for an income tax deduction.

In addition, you’ll want to pay attention to estate taxes and local property taxes.

Estate Taxes: Many heirs to large farms, natural areas or timberland face substantial estate taxes. Estate tax is levied on a property’s “highest and best use”—usually the amount a developer or speculator would pay. The resulting tax burden can be so large that the heirs must sell the property to pay the taxes.

• A conservation easement can reduce estate taxes because the donation of the easement reduces the value of the property. An easement can be donated in a will, and then deducted from the taxable estate.
• In certain circumstances, federal tax law also allows for a 40% reduction in the remaining value of the land for landowners who donate a conservation easement to a qualified organization. This reduced value is the basis for any estate tax.
• Under the Taxpayer Relief Act of 1997, and as amended in 2001, a conservation easement donor is eligible for an additional exclusion from estate tax of up to $500,000 beyond the exclusion of the value of the easement itself.

Local Property Taxes: Local real property tax assessments are based on a property’s full-market value, which takes into consideration the property’s development potential. If a conservation easement reduces or removes this potential, the level of assessment and, accordingly, the amount of real property taxes, may be reduced. Wisconsin Statute §70.32(1g) requires local tax assessors to consider the effects of a conservation easement when assessing property. In practice, there has been wide variation in how easements are considered by assessors across the state.

Landowners can take an income tax deduction for the fair market value of land donated, up to 30% of their adjusted gross income in the year of the gift. Any remaining value can be carried forward as deductions in the next five years, up to 30% of the original adjusted gross income each year.

Donations may sometimes be in the form of a bargain sale, in which the landowner sells his or her property for less than its fair market value. The difference between the fair market value and the actual sale price would be the basis for an income tax deduction.

The land donor must complete IRS form 8283, including the value of the donation, and ask the recipient organization to sign the form to acknowledge receipt of the land. The Natural Heritage Land Trust will not sign an incomplete or blank form 8283, and will ask to see the landowner’s appraisal before signing the form.

For more information about the donating a conservation easements or land to the Natural Heritage Land Trust, call Kate Wipperman or Jim Welsh at (608) 258-9797. The Land Trust cannot provide legal or financial advice, nor guarantee the tax-deductibility of a donation; donors should seek qualified, independent counsel from financial and legal experts familiar with charitable giving of conservation easements and of land.

NOTE: In August 2006, Congress passed, and the President signed, legislation that expands federal conservation tax incentives for people who donate conservation easements.

Section 1206 of HR 4 (The Pension Protection Act of 2006) provides farmers, ranchers, and other landowners with significant tax benefits for donating a conservation easement. The legislation:

• Raises the deduction a landowner can take for donating a conservation easement from 30% of their adjusted gross income (AGI) in the year in which they make the gift to 50%; and (MN to look at actual legislation/LTA and Small differ in language.)
• Extends the carry-forward period for a donor to take tax deductions for a voluntary conservation agreement from 5 to 15 years.

In addition, the legislation allows qualifying farmers and ranchers to deduct up to 100% of their AGI (again with a 15-year carry-forward). Donors will need to check with their financial and legal advisors to determine whether or not they are eligible to use the 100% tax incentive.

This new law is only effective for conservation easements donated between January 1, 2006 and December 31, 2007. After that, the law will revert back to its previous provisions.

For more information about this law, see the Land Trust Alliance’s web site: http://www.lta.org. The Land Trust Alliance is a national organization that represents more than 1,500 land trusts. Potential conservation easement donors should seek qualified, independent counsel from financial and legal experts familiar with charitable giving of conservation easements.