If you’re looking to create a conservation easement or already have one, there may be several tax breaks that you’re eligible for.
- Turning part of your land into a conservation easement can get you an income tax deduction now and annual property tax savings in future years.
- You can create the easement on only a portion of your property.
- You have to give the easement to a qualifying organization.
- Document everything and watch out for too-good-to-be-true tax scams.
Tax Deduction for Creating a Conservation Easement
When you give part of your land to create a conservation easement, you can take a tax deduction for the value of the easement. There are several general rules you need to follow. Ask a tax pro about the specifics of your situation.
To be eligible for a deduction, your easement must be for one of the following uses:
- Outdoor recreation or education for the general public
- Wildlife habitats
- Farm land, forest land, or open space that meets established government policies
- Preservation of historic land or buildings
There are two ways you can get a tax deduction for converting your land to conservation uses.
In a traditional transfer, you’d give or sell the deed to a qualifying charitable organization. This might be for an entire piece of land or breaking off a parcel of your land as a new, separate property.
Giving full ownership in exchange for nothing normally entitles you to a charitable donation tax deduction for the full value of the land. If you sell for less than its fair market value in a bargain sale, you’ll normally receive a tax deduction for the discount that you gave.
In a conservation easement, you keep title to your land but give a qualifying charitable organization the right to use part of your land for conservation purposes. To qualify for the conservation easement tax deduction, the rights generally need to be permanent.
In order to get the conservation easement tax deduction, you usually need to voluntarily give the easement.
The most common example where an easement isn’t voluntary is where your local government requires it as a condition for new development or changing the use of your property. Another common example is where either the buyer or seller of a property wants to create an easement as a condition of selling the property.
If you choose to give an easement subject to conditions relating to the easement, that can still be voluntary. For example, you can ask for a reasonable reimbursement for the cost of preparing the land (but not for the value of the land).
In order to get the conservation easement tax deduction, the organization you give the easement to usually needs to be a qualified organization for charitable contributions plus
- Be committed to protecting conservation purposes
- Have the resources to enforce the easement
- Agree to not transfer the easement to a non-qualifying organization
Your deduction amount is usually limited to 50% of your AGI as an individual or 100% of your AGI as a farmer.
If the value of your easement is worth more than those limits, you can deduct it next year. If you’re still over the limit, you normally get up to 15 years to use up your deduction.
Your limit or deduction amount may be limited by factors such as:
- State tax benefits received for creating the easement
- Unrealized capital gains on your property
- Other charitable contributions
Valuing the Easement
Valuing an easement is complicated. It’s based on a market value appraisal, and there are no hard rules.
For example, if you turn 10% of your property into a conservation easement, your deduction usually wouldn’t be 10% of your overall property value for two reasons.
- The improved areas of your property would have a larger share of the value. For example, your property value is usually the land value plus the value of your house.
- You often still retain some rights to use the easement area, so the deduction usually isn’t 100% of the value of the easement area.
The only way to determine your potential easement value is to have an appraisal done.
You should also be aware that inflated appraisals have gotten a lot of attention from the IRS. Landowners trying to get larger deductions, people promoting tax shelters, and conservation groups have all assessed easements at more than they’re worth trying to get larger tax deductions.
If you’re trying to create a legitimate easement within the tax rules, make sure you know who you’re working with. You may want to contact multiple appraisers.
If you get an inflated appraisal, you may be audited by the IRS and have to pay back taxes and penalties. Of course, you’re fully entitled to claim the tax deduction you’re entitled to if you get a good appraisal and properly document everything.
The best source of information will usually be a licensed tax professional who has an ethical obligation to act in your interests while playing within the IRS rules.
Existing Conservation Easement Tax Deductions
If you have an existing conservation easement, there’s good news and bad news. You usually won’t qualify for any additional income tax benefits, but you usually will get a break on your property taxes.
The reason for no additional income tax deduction is that you already deducted the value of the land transfer.
Property tax breaks for conservation easements can work several ways depending on what state you’re in.
- The land may be assessed at a lower value due to the restrictions and therefore be subject to lower taxes.
- Some states offer specific conservation easement tax credits on your property tax bill.
- Some states have a special property tax status for conservation easements similar to an agricultural classification.
Keep in mind that the conservation easement is still part of your land. The easement only restricts what you can use that land for. That’s why it’s still part of your taxable property.