Donating Conservation Easements & Tax Incentives
About Donating Conservation Easements
Do you want to see your land stay in agriculture forever? Protecting unique farmland through the generous donation of a conservation easement will protect the unique character of agricultural communities in Alaska while ensuring that we will have an agricultural future in the state. Protect the land that you love while having the potential to see tax benefits for you donation of a conservation easement. Landowners can make this donation of conservation easement part of their planned giving strategy.
What happens after an easement is in place?
The current and successive owners continue to own, manage and pay taxes on the land. You can continue the uses of the land you agreed to retain. You decide whether or not to allow public access and, if so, on what terms. Your property is still private. You can pass it on to the next generation, sell it, trade it – you retain all the rights of ownership, except those you voluntarily gave away in the conservation easement.
Those rights you voluntarily gave away will be protected by the Alaska Farmland Trust. Our land trust will monitor your property at least once a year to ensure the agreements made in the easement are being kept. If necessary, the Alaska Farmland Trust will defend the terms of the conservation easement in court.
What are the costs of donating a conservation easement?
At the Alaska Farmland Trust, we recognize the incredible value of the donation of a conservation easement. Generally the costs associated with closing a conservation easement include:
- Appraisal Costs
- Survey
- Legal Costs to review conservation easement
- The AFTC also request the landowner to assist with cost of baseline documentation. A Baseline Document is required by the AFTC for the purpose of establishing the condition of the land at the time the conservation easement is granted. The typical cost for a baseline report is between $1,000-$1,500
- Stewardship Endowment costs (these costs go towards managing the conservation easement over time.)
- Closing and Recording Costs
Who pays for what is generally negotiated on a case-by-case basis based on the value of the conservation easement and unique situation of each donation. Please contact us to begin the process.
What financial benefits will landowners see when donating a conservation Easement?
Landowners who donate conservation easements may be eligible for federal income tax deductions. Charitable deductions can be applied towards offsetting income and capital gains taxes, and looking further down the road, will reduce the potential for future estate taxes.
To determine the value of a conservation easement, and the charitable deduction associated with the donation an independent appraisal process is needed.
How this works
- Step 1. Conservation Easement is prepared identifying the resources that will be protected, while identifying areas that will be used in the future for any buildings etc.
- Step 2. Landowner consults with tax accountant or attorney about the donation and subsequent tax deductions.
- Step 3. Landowner seeks an independent appraisal of the property to determine the value of the gift.
Of Special Note
There are very specific IRS criteria for charitable deductions for conservation easements. This includes, but is not limited to the qualifications of the appraiser, the timing of the appraisal to closing, and the exact nature of the resources being protected etc. Our office can help make you aware of all the IRS requirement before beginning the process.
What will be protected and what are allowable uses of the property with a conservation easement?
Conservation Easements are drafted to contain and protect the unique attributes of the property. Most agricultural conservation easements that we handle are created to protect high quality agricultural soils. When drafting the conservation easement, we will work with the landowner to determine what future plans or family interests might happen on the property. This might include sites for future barns, houses and other structures.
How large of a parcel of land will you accept into the Alaska Farmland Trust?
Tax Incentives
Donors of perpetual conservation easements may save on state and federal income taxes, gift taxes and estate taxes. The conservation easement deduction is more favorable than almost any other type of charitable contribution.
Congress has enacted significant tax benefits to encourage private landowners to voluntarily conserve their land, most recently in 2015, when Congress made even greater tax benefits for the donation of conservation easements to land trusts permanent.1
Income Tax Benefits
The size of a conservation easement donor’s income tax savings will depend on the appraised value of the conservation easement.
For illustrative purposes, assume you are the owner of a farm and would like to donate a conservation easement on the property. Working with Alaska Farmland Trust Corporation (AFTC) staff, you negotiate the terms of the easement, which allows continued agricultural use and protects scenic open space. The easement may allow for construction of additional residences, and precludes commercial development, subdivision, surface mining, and any waste dumping.2
A certified real estate appraiser qualified under the Uniform Standards of Professional Appraisal Practice (USPAP) determines the value of the easement, measured as the difference between the value of the property with and without the easement in place. The appraiser will consider data on comparable properties to arrive at the market value of the property after the conservation is in place. As a general rule, the difference between the before and after values becomes the value of the easement, and the amount of the charitable contribution.
For example, consider a property worth $1,000,000 without a conservation easement, a price which reflects some value for future development potential.
After a conservation easement is put in place forever prohibiting future development, the property might only be worth $600,000. The easement is therefore valued at the difference between these prices, or $400,000. This is also the amount of the tax-deductible contribution, which would help the donor in this scenario save state and federal income taxes for up to 16 years.
Enhanced tax incentives made permanent
Federal tax law, recently made permanent, allows for generous use of charitable deductions attributable to conservation easements.3 Contributions of conservation easements are deductible up to 50% of your adjusted gross income in the year of the donation, and up to 15 years in the future for any unused contribution amounts. The conservation easement deduction is exempt from the alternative minimum tax calculation.4 This is a tax treatment more favorable than almost any other type of charitable contribution.
100% deductibility for qualified farmers & ranchers
For farmers and ranchers, the treatment is even better. Another provision of the law entitles “qualified farmers and ranchers” to take the deduction up to 100% of their adjusted gross income (for individuals and for qualifying farm and ranch corporations), also with a 15-year carryforward.5 That means farmers and ranchers can zero out their income taxes for up to 16 years.6
According to the law, “qualified farmer or rancher” means a taxpayer whose “gross income” from the business of farming or ranching is greater than 50% of the taxpayers gross income for the taxable year in which the conservation easement is donated. This definition applies to individuals and to corporations. For pass-through entities like LLCs and S-corporations, the test is applied at the individual level. For purposes of this incentive, farming, ranching, forestry, and other kinds of agricultural activities satisfy the requirements of the statute.
Deductibility of easement costs
Tax law change: the 2018 Tax Cuts and Jobs Act repealed the deductibility of certain miscellaneous expenses associated with conservation easement projects through at least 2025. Internal Revenue Code (IRC) § 212(3) therefore no longer allows easement donors to deduct certain costs “in connection with the determination, collection, or refund of any tax.”7
Voluntary contributions to endow stewardship of a conservation property are considered charitable contributions.
Estate Tax Benefits
Succession planning
Federal estate tax is assessed on the fair market value of the property at the time of the landowner’s death, not on the original purchase price or current use value. This can be a significant and potentially debilitating tax burden for farm 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, families may have to subdivide and sell some or all of their land just to meet estate tax obligations. Conservation easements can be a useful tool to reduce estate tax liability and allow farms to remain in the family, and to ensure the future use of the property is in accord with the landowner’s desires.
Estate Tax Valuation
Conservation easements are a simple method of avoiding estate tax, because they reduce the value of the property for estate and gift tax purposes. By reducing the property’s estate tax value, a conservation easement could reduce (or eliminate) your family’s estate tax burden.
Additional estate tax exclusion
IRC § 2031(c) also allows estates to exclude from the taxable estate up to 40% and up to $500,000 of the value of the land subject to certain types of conservation easements. These savings are in addition to estate tax savings due to the reduction in value of property in the gross estate after a conservation easement is put in place.
Post-mortem election
The federal tax law allows estate beneficiaries and the estate’s executor to elect to place the land under conservation easement after the owner’s death, but before timely filing of an estate tax return. This provision opens up the possibility of planning to donate a conservation easement in your will, and offers a valuable option to reduce or eliminate estate taxes that would otherwise be owed.
Bargain sales
Income and estate tax deductions may also be available in the event of a bargain sale, where the landowner agrees to accept less than fair market value for a conservation easement on their property, as established by a qualified appraisal. AFTC exists to assist landowners in placing conservation easements on their property and will work hard to find resources available for the purchase of development rights, including accessing the USDA Natural Resources Conservation Service’s Agriculture Conservation Easement Program. In these instances, landowners may still be able to take a tax deduction for the donated portion of the value of the easement.
Estate planning
Conservation easements are only one of several planning options available to effectively pass on a farm or property, as well as other assets, to the next generation. AFTC often sees conservation easements being fully integrated into a landowner’s plans for his or her estate, with terms in the easement and its donation reflecting many of the same desires driving the landowner’s overall estate planning process.
No matter your age or wealth, your estate plan should reflect how you want to take care of the most important people in your life and the type of legacy you want to leave. With a few simple steps, you can be sure your family will be well cared for and your property will be distributed as you intend.
Qualifying for a tax deduction
To ensure your gift makes IRS requirements for tax-deductible conservation easements, it is strongly recommended that the proposed gift be reviewed by a qualified tax professional early in the process. Not all properties will qualify, and a deductible, charitable contribution can be made only to a limited number of IRS-qualified, tax-exempt organization such as AFTC. A number of other requirements are present, including that the donation must be fully complete, recorded, and made in perpetuity rather than for a shorter period of time.
Conservation easement appraisal
In order to claim a tax deduction on any charitable donation for property worth more than $5,000, donors must obtain an appraisal by an appraiser qualified under the Uniform Standards of Professional Appraisal Practice (USPAP). Check with your attorney or accountant for details. You should consult with a professional appraiser who has direct experience with charitable gifts or conservation easements. AFTC can refer you to appraisers with experience in this field, but cannot provide the appraisal. The appraisal cost is a necessary expense if you wish to pursue a charitable tax deduction.
References:
1. Internal Revenue Code (IRC) § 170(f)(3)(B)(iii); Treasury Regulation (TR) 1.170A-14 | 2. TR 1.170A-17(b) and 1.170A-14(i) | 3. IRC § 170(b)(1)(E) and (h) | 4. IRC § 170(b)(1)(E)(ii) | 5. IRC § 170(b)(1)(E)(iv) | 6. IRC § 170(b)(1)(E)(v) | 7. IRC § 67(g)
This website is intended to be an educational guide only and should not be seen as legal, accounting or any other professional advice. Please consult with the professionals in the instance that you would like to make a bequest to the Alaska Farmland Trust.
The Alaska Farmland Trust envisions a future with thriving local food markets that will give Alaskans access to fresh, healthy food, and keep our farmers farming.
907-707-4083