Conservation easements have grown in popularity in recent years, partly due to the impactful tax benefits available to the donor. A conservation easement is a restriction on the use of land, voluntarily granted by the landowner to a conservation organization or to a government sponsored entity. The general rule for permanent conservation easement donations is that the property owner can take a charitable contribution tax deduction on their return for the difference in the fair market value of the land before the conservation easement and after the conservation easement. Currently, the donor can take a conservation easement charitable deduction of up to 50% of their taxable income in a given year. Should the value of the conservation easement charitable deduction exceed this taxable income threshold in the first year, the taxpayer can use the remaining deduction over a fifteen-year carryforward period (no carryback is allowed and the same 50% taxable income limit applies during the carryforward period). Certain agricultural workers can take up to 100% of their income as a charitable contribution in a given year (the same carryforward rules apply should the amount of the total conservation easement charitable contribution deduction exceed 100% their taxable income).
In order for a taxpayer to qualify for this conservation easement tax initiative, the donor must contribute some, or all of the rights pertaining to the use of their land to a land trust or government sponsored entity. The IRS realizes that, for many landowners, the property subject to the easement is their single largest asset. The Service also understands that when a taxpayer establishes an easement to conserve the land for a specified future use, the value of the land usually decreases. Therefore, in order to mitigate the effect of the decreased property value and to encourage landowners to consider this program, the IRS increased the amount of tax benefits associated with the conservation easement initiative in 2015.
While there is an immediate tax deduction available to donors who establish a conservation easement, there is another tax benefit that is often overlooked: the ability to exclude a portion of the value of the conservation easement land from a donor’s taxable estate at death. As part of the Tax Cuts and Jobs Act of 2017, Congress doubled the threshold of the Estate Tax Exemption. The Estate Tax Exemption threshold for 2019 is $11.4 million for an individual, $22.8 million per couple. This means that as long as a taxpayer’s gross estate value is less than $11.4 million or $22.8 million if married, the estate is not subject to tax for the heirs of the estate. Internal Revenue Code (IRC) Section 2031(c) allows taxpayers to exclude a percentage of the value of land subject to a conservation easement from the taxpayer’s taxable estate at death (the basic rule is forty percent (40%) but could be slightly modified depending on the fact pattern of the taxpayer. For simplicity, in our example we will assume there are no modifications). Regardless of whether the taxpayer’s taxable estate is $400 million or $30 million, the same 40% exclusion rule applies. However, under IRC Section 2031(c), there is a maximum exclusion of $500,000 from the estate tax, meaning, that only $1,250,000 of gross land value can be excluded ($1,250,000 of land value multiplied by the 40% exclusion equals the maximum $500,000 exclusion amount).
One of the more interesting rules of this exclusion from the gross estate at death is that it applies to both conservation easements established during the property owner’s life as well as after their death. If the father of the family and landowner never wanted to establish a conservation easement but his children (the heirs) do, a conservation easement can still be established after the landowner passes away (but before the estate tax return is due) and the 40% exclusion from the taxable estate still applies. However, under IRC Section 2031(c)(9), no income tax charitable contribution deduction is allowed for post-mortem conservation easements.
Conservation easements are especially beneficial to property owners whose land makes up a majority of their estate. Establishing a conservation easement reduces the amount of their taxable estate and thus, also reduces the risk that the heirs will be forced to sell some, or all of the land to pay the estate tax. One potential negative to the estate tax benefit is that the heirs of land with a conservation easement do not receive the land with a “stepped up” basis to fair market value as is customary with other investments. As prescribed in IRC Section 1014(a)(4), the heirs hold the same, “carry-over” basis in the property as the original property owner, which would increase their taxable gain if they eventually sold the land subject to the easement.
Because of the income and estate tax benefits previously discussed, conservation easements should be considered by any landowner.
This article should not be construed as, and should not be relied upon as legal or tax advice.
Tyler Davis works for SVN Saunders Ralston Dantzler real estate and also owns his own CPA Firm, Tyler Davis CPA where he provides tax preparation and tax consulting services. SVN Saunders Ralston Dantzler is leading agricultural land and commercial brokerage and development based in Lakeland, FL. Tyler can be contacted at firstname.lastname@example.org.