Have you ever considered a conservation easement of your ease of land? Did you know that donating land to the government comes with certain tax benefits? If you’ve never considered an easement before, now might be just the right time. Keep reading to find out what the conservation easement tax deduction looks like, and whether it’s the key to boost your estate plan in a feel-good way.
What is a Conservation Easement?
A conservation easement is a type of voluntary, legal agreement that allows you to permanently prevent your land from getting developed. You can either sell or donate the easement to the government or a land trust. As the owner, you get to continue living on and using the land, plus bequeath it to your heirs through your estate plan. The owner of the easement is responsible for monitoring your land to make sure that terms of the easement are not broken. It’s one viable option to protect property indefinitely for the enjoyment of future generations. Be sure to read our guide, “Conservation Easement: How to Protect Land Conservation Value,” for more information on how conservation easements work.
What Are the Benefits of Donating Land to the Government?
When you’ve worked hard to amass enough wealth to buy land, you may initially scoff at the idea of giving it away to the government. (Or perhaps your story is similar, like you inherited land that was passed down from generation to generation in your bloodline.) “No, thank you very much. I’ve worked very hard to own this land and want to pass it down to my heirs.”
What many don’t realize is that donating or selling a conservation easement can be a win-win for everyone involved. The government or land trust organization gets to continue their mission of conserving and protecting land for conservation purposes. It’s a benefit to the public good, from both an environmental and economical perspective.
As a landowner, creating an easement means that you get to be an integral player in a conservation mission that will benefit the public for generations to come. By selling or donating a conservation easement, you are ensuring that your land will not get bought out and developed for commercial, residential, or industrial purposes. Not only do you get to use and enjoy the land during your lifetime, you also get to pass it down from generation to generation in your family. This is quite the heart-centered approach to building your legacy.
If you’re not necessarily a conservationist or nature-lover, you might be enticed solely by the conservation easement tax benefits. The federal government incentivizes conservancy efforts by exchanging tax benefits in exchange for land donations. We explain this in detail next.
What Are Conservation Easements’ Tax Benefits?
The conservation easement tax deduction is noteworthy, and reason enough to consider this option for your land. By donating a conservation easement to a land trust or government agency, your estate taxes can be reduced in two ways:
Your value of your overall estate is reduced.
Your heirs can exclude 40 percent of the land value from their estate taxes
A conservation easement lowers your property value, and thus the value of your estate overall. In some cases, obtaining a conservation easement may be the solution to lowering your estate value below the tax threshold. It could be the key to avoiding estate taxes altogether. This is especially something to consider if you have a lot of value tied into your land.
Second, you retain the right to bequeath your land to an heir, even if it has a conservation easement on it. The Internal Revenue Services provides that your heir can exclude up to 40 percent of the encumbered land value (protected by a conservation easement) from their taxes. This exclusion is capped at $500,000. Be sure to read Section 2013 of the IRS code regarding tax on prior transfers for a full understanding of various stipulations of this tax benefit.
Keep reading to find out about an additional tax deduction you can make if you choose to donate a conservation easement.
How to Use the Federal Conservation Tax Deduction
If you’re considering donating a conservation easement to a land trust or to the government, you’re probably wondering how to take advantage of any tax deductions.
If you choose to voluntarily donate the easement, you will qualify for charitable tax deductions on your federal income taxes. This deduction for landowners was first introduced in 2006. It served as an incentive to support the government’s mission to protect land, conserve resources, and provide public benefit. The government then made the tax incentive permanent in 2015. They also strengthened the incentives for landowners.
Landowners who donate a conservation easement can make a charitable gift deduction from their annual income. The deduction rate was 30% in 2006 and was increased to 50% in 2015. Next, donors had a carry-forward period to take their tax deduction for their conservation agreement. This period was extended from 5 years to a whopping 15 years. This means that donors can wait to take their deduction until a tax year in which it would make the most fiscal impact. Last but not least, qualifying farmers and ranchers can deduct up to 100 percent of their income, increased from 50 percent. This policy created a strong incentive for income-producing landowners to donate easements to the government.
Should Conservation Easement Be a Part of Your Estate Plan?
Should a conservation easement be a part of your estate plan? The best way to make this decision is to think about what kind of legacy you’d like to leave, and whether you find the conservation easement tax deduction beneficial to your overall estate planning strategy.
The tax benefits and deductions are certainly more attractive today than they ever were before. By donating a conservation easement to the government or a land trust, you get to deduct your income taxes by 50 percent. Further, you get to pay the benefits forward to your heirs. First, your overall estate value is reduced. If the size of your estate was over the estate tax threshold originally, a conservation easement likely could bring you under the threshold. This means that no estate taxes are paid. Further, your heir can also exclude up to 40 percent (or the cap of $500,000) of the land value from their own estate taxes. Last but not least, you and your heirs still get full use and enjoyment of the land as if it were your own.
If you have a penchant for conservation, an easement could be a win-win solution. Not only are you creating strong financial benefits for you and your family, you also get peace of mind knowing that your family land will be preserved permanently. That would be quite the legacy!
If you should choose to donate a conservation easement, don’t forget to update your Estate Plan. You’ll need to update your deed documentation, plus your instructions for how your land should be passed. Looking for an easy, efficient, and organized way to keep your estate planning documents updated and in order? Trust & Will has the perfect solution for you! Find out how our platform has made it easy for families to secure their legacies, for themselves and their loved ones.
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