To determine how a conservation easement donation may affect your taxes, you need to consult your own professional tax and/or legal advisor. The Southwest Michigan Land Conservancy does not claim to give legal or tax advice about the consequences of a particular conservation easement. This is a hypothetical example.
Let’s say the Smiths own a 100-acre property here in Southwest Michigan. They use the house and outbuildings, but most of the property is natural with some old fields, woods and wetlands. Without a conservation easement their property could be marketed and sold for industrial, commercial, or residential development. An appraiser determines the fair market value of their property, unrestricted, is $750,000.
The Smiths create a conservation easement and choose to prohibit future subdivision or home construction on their property. The appraiser determines that removing this development potential reduces the value of the property to $250,000. Therefore, the value of their conservation easement is $500,000:
Unrestricted Property: $750,000
Property with Easement: - $250,000
Easement Value: $500,000
The Smiths donate the conservation easement to the Southwest Michigan Land Conservancy. They then can claim a $500,000 charitable donation for their personal federal income taxes, up to 50% of their adjusted gross income (AGI). They are not able to use the entire donation in the first year, so the excess can be carried forward and deducted (with the 50% limit) for up to 15 additional years.
Assume the Smiths’ adjusted gross income in the year of the easement donation is $120,000 and it remains the same for the next 15 years. Their total easement deduction over the next 9 years is $500,000.
The actual income tax savings you would realize is a function of your income tax bracket. In this example, the Smiths were in the 28% tax bracket, they would apply their tax rate to a $60,000 AGI instead of a $120,000 AGI each year they took a deduction ($120,000 - $60,000 = $60,000). Their tax savings for each of the first 8 years would be $14,939.50. The remaining $20,000 would be taken in the 9 th year, the final year of deduction for a savings of $4,192. The total income tax deduction realized for the Smiths would be $123,708.
Year |
Deduction (50% x $120,000) |
Income Tax Savings * |
1 |
$60,000 |
$14,939.50 |
2 |
$60,000 |
$14,939.50 |
3 |
$60,000 |
$14,939.50 |
4 |
$60,000 |
$14,939.50 |
5 |
$60,000 |
$14,939.50 |
6 |
$60,000 |
$14,939.50 |
7 |
$60,000 |
$14,939.50 |
8 |
$60,000 |
$14,939.50 |
9 |
$20,000 |
$4,192.00 |
10 |
~ 0 ~ |
~ 0 ~ |
11 |
~ 0 ~ |
~ 0 ~ |
12 |
~ 0 ~ |
~ 0 ~ |
13 |
~ 0 ~ |
~ 0 ~ |
14 |
~ 0 ~ |
~ 0 ~ |
15 |
~ 0 ~ |
~ 0 ~ |
16 |
~ 0 ~ |
~ 0 ~ |
Total |
$500,000 Maximum Deduction |
$123,708 Income Tax Savings |
|
|
*Based on income and tax bracket |
New Tax Legislation
The 50% AGI deduction as well as the 15 year carry-forward option are new incentives to conservation easement donations that were signed into law in April of 2008. A third incentive is an option for qualified farmers that donate a conservation easement could take a 100% AGI deduction. These incentives are only in affect for the calendar years of 2008 and 2009 as it now stands. If not extended, the deduction possibilities will reduce back to 30% AGI and 5 year carry forward incentives.
How does the bill change the current tax incentive for conservation donations?
The new law:
- Raises the deduction a donor can take for donating a conservation easement from 30% of their adjusted gross income in any year to 50%;
- Allows qualifying farmers and ranchers to deduct up to 100% of their income; and
- Extends the carry-forward period for a donor to take tax deductions for voluntary conservation agreements from 6 to 16 years.
Can you give me an example?
Under the previous rules, a landowner earning $50,000 a year who donated a $1 million conservation easement could take a $15,000 deduction for the year of the donation and for an additional 5 years – a total of $90,000 in tax deductions.
The new rules allow that landowner to deduct $25,000 for the year of the donation and then for an additional 15 years. That’s $400,000 in deductions. If the landowner qualifies as a farmer or rancher, they can zero out their taxes. In that case, they could take a maximum of $800,000 in deductions for their million dollar gift.
Can anyone deduct more than the value of their gift?
One can never deduct more than the fair market value of the gift. This change simply allows landowners who previously could not deduct the full value of their gift to deduct more of that value.
What is the timeline for this expanded incentive?
The new law applies to all easements donated in 2008 and 2009.
LTA will work hard to make this change permanent — but as it stands it will expire at the end of 2009. If a donor qualifies under this provision, they can continue to apply its formulas to the amount of their contribution that they carry over into years beyond 2009.
Does this only apply to conservation easements?
The expanded incentive applies to all donations covered in IRC section 170(h)(2), which includes donations of the entire interest of the donor other than a qualified mineral interest; a remainder interest; or a permanent conservation or historic preservation easement.
