The information on this page is intended for the general information of landowners. Any landowner contemplating the donation of land or a conservation easement should consult a qualified attorney, accountant or other tax advisor.
Federal Tax Benefits of Conservation Easements
The Internal Revenue Service (IRS) Code allows two principal forms of tax benefits from donations of conservation easements: a federal income tax deduction and an estate tax exclusion. The amount of the deduction or exclusion is determined by an appraiser who calculates the decrease in value caused by the permanent restrictions on the use of the land from the conservation easement. Only easements granted in perpetuity are eligible for the tax benefit. In addition to the above two tax benefits, it is an accepted estate tax planning technique to use an easement to lower the value of land (and consequently the amount of tax) upon which estate taxes will be owed when the goal is to pass the land to the next generation and to forestall the land having to be sold in order to pay the estate tax.
Income Tax Deductions - Easements as a Charitable Gift
The IRS Code (Sec. 170 (h)) allows charitable gifts of qualified conservation contributions, which include the donation of land in fee or the donation of a perpetual conservation easement. The donation must be made to a qualified organization exclusively for "conservation purposes."
The code specifically defines "conservation purposes." The regulations outline four such conservation purposes
- preservation of land areas for outdoor recreation by, or the education of, the general public
- protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem
- preservation of certain open space (including farmland and forest land)
- preservation of historically important land or certified historic structure
The landowner donating an easement is permitted to take as an income deduction, up to 30 percent of their adjusted gross income (AGI) in the year of the gift. For tax year 2011, the amount is 50 percent of AGI, and for qualifying farmers and foresters, 100 percent of AGI. A private certified appraiser evaluating the value of the easement must determine the value of the gift. If not exhausted the first year, the amount of the gift can be carried forward for as many as 15 subsequent years.
Estate Tax Benefits of Easements
The Internal Revenue Code allows for an estate tax exclusion from federal estate taxes of up to 40 percent of the value of land under conservation easement. The exclusion is capped at $500,000. To qualify, the easement must be perpetual, and must meet the conservation purposes of Sec. 170(h) above (except that preservation of a historic area or structure is excluded). The easement may be given by a landowner who has owned his land for at least three years, by a family member, or the executor of the estate of such a landowner. The intent of this provision is to provide relief from estate taxes for farmers and ranchers passing land to their children who might otherwise be forced to sell the land to pay estate taxes.
Virginia State Tax Benefits of Conservation Easements
The charitable gift deduction taken for a conservation easement on the federal tax return therefore results in the same diminution in taxable income for state income tax purposes as it does for federal income purposes.
Land Preservation Tax Credit
In addition, Virginia law allows a tax credit of an amount equal to 40 percent of the value of a gift of easement or land. The unused portion of the credit may be carried forward for a maximum of 10 consecutive tax years, and any portion of the tax credit can be transferred to other taxpayers.
Click here for brochures, applicant forms, conservation review criteria and other information on the Land Preservation Tax Credit.
Click here (PDF) to download a brochure in which the tax benefits of land conservation in Virginia are described.
In addition, for purchased easements, a Virginia state capital gains tax exclusion permits a landowner to exclude capital gains from the sale of land on which an open space easement has been placed and on which Virginia capital gains tax would otherwise have been levied.
Local Tax Benefits of Conservation Easements
In those localities where the land use assessment tax program has been implemented, a conservation easement requires that counties value the property as if it were in the land use taxation program. In addition, local assessors are required by state law to recognize the restricted value of the land with the easement in place.