Ease-ment Does It

Ease-ment Does It

Article posted in Conservation Easement, Regulations on 3 February 2016| 2 comments
audience: National Publication, Two Hawks Consulting, LLC | last updated: 3 February 2016
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Summary

The new PATH amendment finally makes permanent, very favorable rules on Conservation Easements. Time to get the word out.

By: Randy Fox, Two Hawks Consulting

With all of the hoopla and brouhaha surrounding the permanent enactment of the charitable IRA rollover, which will certainly impact a segment of donors (and will certainly be ballyhooed by charities in the coming years), another important provision of the same act has been mostly ignored in the press. The conservation easement has had new life breathed into it by reverting to rules that expired a few years ago.

Conservation easements preserve open space, generally in rural areas but also in urban and exurban areas as well. They allow the owner to set aside a portion of his property in perpetuity; free of future development, urban creep or corporate farm or ranch expansion. While this may seem like no big deal to many of us city dwellers, preserving open space is important for a number of reasons. Trails, parks, watersheds and wildlife refuges are important to preserve nature’s balance as well providing recreational areas for those seeking relief from the pressures of urban living. It’s estimated that America loses 5,000 acres per day to development. Providing landowners with an economic incentive to set aside some of their land just makes sense.

For many landowners, a conservation easement can help preserve property for the next generation. Because a conservation easement lowers the value of the property since it can’t be developed, larger tracts of land may escape estate taxes and, thus, remain in the family more readily.

The big benefit of the enactment of the law, however, comes in the actual changes in the tax code.  Unlike other “hard to value” assets like land or personal property which can only be deducted up to 30% of Adjusted Gross Income (AGI), a conservation easement can be deducted up to 50% of AGI for most landowners. If you are a qualifying farmer or rancher, meaning you make 50% or more of your income from farming or ranching, the deduction is good up to 100% of AGI. And, true for everyone, any unused portion of the deduction can be carried forward for an additional 15 years.

For example, farmer Brown earns $50,000 of AGI a year from his farming activity. He has 1,000 acres of farmland valued at $5,000 per acre. Thus, his total holdings would be value at $5,000,000. Working with the local land trust (most conservation easements are conducted with the help of a local land trust), they identify 150 acres that would qualify to be permanently set aside. Farmer Brown now has a $750,000 income tax deduction to deduct up to 100% against his $50,000 annual AGI. He will utilize the entire deduction with a year left to spare and the land trust has 150 acres of beautiful open space.

Most of the attention in the philanthropic press has been aimed at the charitable IRA deduction while the conservation easement change has been largely ignored. This change will mean a lot to all of us and it’s important for all of us to get the message out there.

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Re: Ease-ment Does It

Great article but have clarification question. You state that the farmer gets a full FMV deduction of the entire 150 acres of property that is being affected but that should only apply if he gives the entire interest to the charity, correct? If he simply gives a conservation easement (really the development rights) to the charity, then he should only get a charitable deduction for the reduction in value of his property comparing the before and after giving the easement values, correct? Thanks for clarifying this for me.

Re: Ease-ment Does It

Technically, you are correct. The deduction is based on the valuation of the easement, whatever that is.

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