Protect Your Land Assets: Nab Tax Incentives
When a landowner hears the term "conservation easement," several thoughts may run through her mind: "A conservation easement would prevent me from farming my land." "A conservation easement requires that I allow public access." Or "I have very little federal income tax liability, so a conservation easement would provide no benefit to me or my family." In fact, none of these statements is true, and although many people are generally aware of conservation easements, misconceptions abound as to how conservation easements work, what's required when one enters into one, and what tax benefits are available for placing a conservation easement on one's land.
A conservation easement is a voluntary conveyance of a portion of one's property rights – for example, the right to subdivide or commercially develop the property or to use the property for industrial or other commercial purposes – to a governmental or nonprofit agency in perpetuity. The landowner retains ownership and possession of the underlying property and may continue to live on the property, construct a limited number of residential or other structures, conduct agricultural activities or harvest timber, or use the property in any number of ways, so long as such activities do not significantly impair the property's important natural resources. Development of a conservation easement involves a negotiated process between the landowner and the recipient organization, but ultimately a conservation easement is an inherently flexible agreement that a landowner can tailor according to the owner's current and possible future uses of the property, again, so long as those uses will not impair the property's conservation values.
Conservation easements can be sold or donated (or a combination of both, known as a "bargain sale"); however, obtaining federal, state or local funding for a conservation easement is quite difficult at the moment due to current economic conditions. And if funding is available to protect a certain type of property, the grant process is highly competitive.
However, despite this relative lack of funding for purchasing conservation easements, there are several valuable tax benefits available for placing a conservation easement on one's property in Michigan, such as property tax benefits and federal income and estate tax benefits. Perhaps most notably, land subject to a conservation easement in Michigan is not "uncapped" for property tax purposes when the property changes hands, which can have a significant effect on future owners who obtain the land by purchase or inheritance. This aspect of Michigan property tax law likely drives as many conservation easement transactions as do the equally beneficial federal income and estate tax incentives.
In addition, if a landowner has even some federal income tax liability, a donation of a conservation easement can have particularly favorable income tax benefits. For instance, if a landowner would otherwise pay $20,000 in federal income taxes in a given year, but because of a donation of a conservation easement, she doesn't have to pay any, she now has $20,000 that she can save or reinvest in her property or business. Donations of conservation easements have produced federal income tax savings since the 1970s, but through the end of 2009, there were even greater federal income tax incentives for making a donation of a conservation easement, especially for farmers and ranchers. Generally, the use of a charitable donation to reduce taxable income is limited by the amount of income one has. For example, if an individual has an annual income of $50,000, that person can deduct only 30 percent of his adjusted gross income, or $15,000, each year and carryover any remaining amount for an additional five years for donations of capital assets, such as land or a conservation easement. Under the enhanced incentives, however, an individual could deduct half of his adjusted gross income and carryover any remaining amount for 15 additional years; if the individual is a "qualified farmer or rancher" (as defined in the Tax Code), he could deduct all of his income (that is, zero out his federal income tax liability) for the year of the gift and carryover any remaining amount for 15 additional years.
Although the enhanced incentives officially expired at the end of 2009, Congress is considering extending the incentives for an additional year (or perhaps even indefinitely) to be applied retroactively to the beginning of 2010. Keep in mind, however, that even if Congress opts not to extend the enhanced incentives, donations of conservation easements will still be eligible for a federal income tax deduction and therefore will produce tax savings, just not as significantly as under the enhanced incentives for landowners with limited income tax liability. And for estate tax purposes, because the value of property encumbered by a conservation easement is reduced by virtue of the restrictions on the uses that can be made of the property, the landowner will owe fewer estate taxes or may avoid estate tax liability entirely.
So even in a struggling economy when there may be fewer options for the sale of a conservation easement, there are still great financial benefits of donating an easement. Because these can be complicated transactions, landowners should start the process early and always work with a tax expert who is experienced and knowledgeable in conservation easement transactions.
Fred is an Of Counsel attorney at the Traverse City firm of Smith Haughey Rice & Roegge, where she practices in the areas of tax, real estate, and estate planning. Ellen also maintains a solo law practice focusing on conservation easements and other land conservation transactions. 231.228.2372, firstname.lastname@example.org or 231.486.4558, email@example.com.