Financial Planning Magazine
By Donald Jay Korn
October 1, 2008
...A lesser-known member of this exclusive club is the conservation easement, the gift of development rights on a piece of property to a government body or land trust in order to keep the land partially or fully wild. A landowner donating an easement may get breaks on income, estate and property taxes.
Even better, the recently passed farm bill allows easement donors to deduct gifts of up to 50% of their adjusted gross income (AGI), so long as the easement doesn't prevent farming or ranching on the property. (Farmers can deduct up to 100% of their AGI.) Gifts in excess of that amount can be carried forward up to 15 years. ... In 2010, the tax benefits may revert to lower ceilings: up to 30% of AGI and a five-year carryforward. (These provisions were originally part of the Pension Protection Act of 2006, which expired after 2007 and were revived in the farm bill.)
In many cases, though, clients seeking conservation easements are not driven by tax concerns. "One of my clients recently donated an easement worth $600,000 to a local land trust," says Tom Rogers, a principal at Portland Financial Planning Group in Maine. "She was oblivious that she'd be eligible for a significant tax deduction until I told her about it."
Income Tax Treatment
Rogers' client owns acreage that abuts a beautiful lake in Maine. "The property, which has been in the family for nearly a century, contains a vacation home," Rogers says. "My client wanted to keep the property in the family and also wanted to prevent development on the land."
To accomplish her goals, the client donated an easement to a local land trust that "permits the vacation home to remain there, but prohibits future development," he says. "Before going ahead with the easement, my client checked with her children, who were on board with the idea." Discussing an easement donation with heirs can be vital because the property's resale value will likely be reduced by the restriction, which is in perpetuity.
An appraiser hired by the landowner provided valuations, before and after the donation. The appraisal showed that without the development rights, the property lost $600,000 of its value. Thus, the donor got a $600,000 income tax deduction for making a charitable contribution to the land trust.
Due to the sharp loss of appraised value, easement donations commonly result in six- and even seven-figure charitable deductions. A deduction this valuable used to be hard to realize, and could be so again if the new rules are not extended. For example, under the old rules, which are set to return after 2009, a donor entitled to a $600,000 write-off would need an AGI of $333,333 to take a $100,000 charitable deduction each year for six years, says David Scott Sloan, partner in the Boston office of the law firm Holland & Knight. Under the tax rules for 2008 and 2009, that client could have an AGI as low as $80,000 and still be able to deduct the full amount: $40,000 over 15 years.
But it may make sense not to stretch the charitable deduction from an easement donation far into the future. "My client with the $600,000 deduction is a retired professor with over $1 million in tax-deferred accounts," Rogers says. "I suggested she convert some of that money to a Roth IRA, which would increase her AGI, and use the easement deduction to offset 50% of that income." After five years and after age 591/2, all Roth IRA withdrawals will be tax-free.
Estate Tax Treatment
Cutting a property's appraised value by $600,000 will reduce the size of the owner's estate and may eventually save estate tax. There is also a federal estate-tax exclusion for easement donors "worth up to 40% of the value of the land, but not structures, subject to a donated conservation easement," Sloan says. ...
Property Tax Treatment
Reducing the property's appraised value with a conservation easement may also reduce property tax payments. ... Rogers says, "... [If]the property was assessed as a regular lot, the tax savings can be important."
Mark Jendrek, an attorney in Knoxville, Tenn., says that some states automatically reduce the tax on properties subject to a conservation easement. ...
Paying the Price
Even after donating a conservation easement and reaping the tax advantages, clients still retain property ownership rights. They can use the real estate themselves, give it, bequeath it, or sell it, and they needn't permit public access.
Thus, a conservation easement donation may offer multiple benefits, especially for clients who want to preserve open space, forest land or scenic views. But the process is costly. "You'll probably have to hire an appraiser, an engineer, a surveyor, lawyer, title search expert and perhaps a tax professional," Sloan says. Donors are likely to incur thousands of dollars in fees.
.... Before-and-after appraisals are likely to get close scrutiny, so they should be well-reasoned and from a reputable firm.
Other hurdles must be cleared in obtaining a conservation easement. For instance, it is necessary to find a recipient: The client must locate a local government or a qualified not-for-profit conservation group that is willing to accept the gift. Leads to groups that will accept conservation easements may be available from the Land Trust Alliance, the Nature Conservancy and the Trust for Public Land.
... But a land trust or similar organization will accept a conservation easement only if it perceives a significant benefit from preventing development in that area. "The group that accepts the easement becomes responsible for monitoring it in perpetuity," Jendrek says. "Someone has to go to the property periodically and make sure the provisions of the easement haven't been violated. If there is a violation, the group has an obligation to bring an action."
Typically, the recipient will expect some financial help to offset the costs of enforcing the easement. "My client made a cash donation to the local land trust, along with the easement donation," Rogers says. ...
On the Sell Side
Not all conservation easement transactions involve donations. "Another one of my clients owns some property in New Hampshire that has been in her family for decades and is very suitable for a conservation easement because of its location," Rogers says. Not only is the property in a scenic area; there are also many second-home owners nearby who have a keen interest in preventing extensive development.
This client wasn't in a financial position to give away the conservation easement, so she put it up for sale. Selling the entire property without an easement wasn't an option, according to Rogers, because the client feared that the buyer would allow development.
A local conservation group was willing to buy the easement. ... "Some of the funding came from a federal farmland protection program and the balance came from private citizens," Rogers says. "Ultimately, my client received $475,000 by selling off the property's development rights." ...
History Lessons
Conservation easements must serve a valid purpose to qualify for tax breaks, including preservation of certified historic structures. ... Owners can create easements on commercial as well as residential properties.
... Now an easement donated on property located in a historic district must preserve the entire exterior of the building, not just the facade, in order to qualify for tax benefits. Taxpayers must attach to the relevant tax return a qualified appraisal, photos of the entire exterior of the building and a summary of all development restrictions in the easement. City or country, easement tax breaks may not come easily.
Senior Editor Donald Jay Korn's mystery novel, Payable on Death, is available at Amazon and other online booksellers.
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