Land conservation does not usually get much press, but Congress has recently extended one of the best incentives for landowners in a long time.
In 2007, Congress applied new incentives to donations of a conservation easement made in 2006 and 2007. This past summer, the incentives were extended for these qualified conservation contributions made in 2008 and 2009.
Under the old rules, an individual could take a conservation easement donation up to 30% of AGI (adjusted gross income, essentially the gross income before itemized deductions and exemptions) with a 5 year carryforward of any unused amount. The new rules for a conservation easement donation put in place in years 2006-2009 allow an individual to take such a donation up to 50% of AGI with a 15 year carryforward of any unused amount. This is a big benefit for donors with significant income and large potential donations (conservation easements). Why would Congress encourage such behavior? The benefit to the State or other qualified chartiable organization is permanent restrictions on property that cost them essentially nothing - the public gets the true benefit.
What is a conservation easement? A conservation easement is a restriction that is placed on property you own. To qualify, you must grant an easement on the property in perpetuity to a charitable organization or governmental unit that is committed to protecting the gift's conservation purpose and has the resources to enforce the restrictions. Conservation groups generally qualify, such as a local or state land trust. An easement is different from an outright gift of property which has different donation limitations - hard to believe, but a conservation easement placed on your property may be a bigger incentive than an outright gift under these new rules.
The gift must be exclusively for one of the following conservation purposes:
• Preserving land areas for outdoor recreation by, or the education of, the general public.
• Protecting a significant natural habitat of fish, wildlife, plants, or a similar ecosystem.
• Preserving open space (including farmland and forest land) for the general public's scenic enjoyment or under a governmental policy.
• Preserving an historically important land area or a certified historic structure.
These incentives are a substantial benefit for the right donor and situation. Some donors may not be able to use up a large donation deduction immediately but can use these deductions in future years. Depending on the situation, the process may be complex and time consuming and no one knows if there will be another extension in the future, so if you want to take advantage of this incentive, get started soon.
Note: There are special rules for qualified farmers/ranchers and land held in S and C corporations. Consult your tax advisor for these special rules.
Example: 100 acres purchased 20 years ago for $1,000/ac. (donor has total basis of $100,000 in 100 acres). Donor prepares a development plan and establishes the highest and best use of the property is residential lots. Donor grants a conservation easement on 90 acres to local land trust. Valuation of the easement is $1,250,000. Donor has $250,000 AGI in 2008 and uses $125,000 donation deduction to lower taxable income to $125,000 and carry forward unused donation of $1,125,000 to future years.
Due to the significant tax breaks associated with conservation easements, the IRS has been actively challenging taxpayers where a potential abuse is perceived. The Pension Protection Act of 2006, enacted several provisions not only to encourage conservation, but also to limit abuse. One abuse perceived by the IRS is a gross valuation misstatement, as recently argued in court in the Whitehouse Hotel case (October 2008) where the taxpayer's donation was reduced and they were penalized for failure to make a good faith investigation of the value determined by the appraiser.
Bottom Line - these incentives could be a significant tax savings for the right donor. However, the donor has to comply with the applicable provisions and properly document the charitable donation.