Landowners conserve their farms and forests, their scenic mountainsides and trout streams because they care about their land and their heritage. In addition, the federal and state governments offer thousands of dollars in tax deductions, tax credits, reductions in local property taxes and estate tax savings as an incentive to save Virginia’s rural landscape and heritage.
I. Federal Income Tax Deduction:
The federal tax deduction for the donation of a qualifying conservation easement is 50% for landowners and 100% for farmers who receive 50% or more of their income from their land. This deduction can be taken over the course of 16 years or until the easement donor reaches the amount the property was devalued (easement value) by restricting it with a conservation easement. As of August 2018, the IRS calculates the deductible easement value by subtracting the amount of state tax credits received for the easement.
- The deduction for most landowners is 50% of the landowner’s adjusted gross income. The unused portion of the gift may be carried forward as a deduction for the next 15 years, subject to the 50% limit each year. So, if your easement value equals $300,000 and you receive $120,000 in Virginia tax credits for the easement, your federal deduction is $180,000. If you earn $60,000 a year, you can reduce the amount of income on which you pay taxes by $30,000 a year. Over 6 years, you would legally avoid paying federal income taxes on 60% of the easement value for a total of $180,000.
II. State Tax Credit:
A Virginia state tax credit has been established for conservation easements at 40% of the value of the easement. The amount of the credit that may be used by an individual taxpayer may not exceed $20,000 for taxable years 2015, 2016 and 2017, but any unexpended portion may be carried forward for 12 taxable years. Using the example from above of an easement value of $300,000, the easement donor would receive $120,000 in VA Preservation Tax credits that could then be used dollar for dollar at maximum amount of $20,000 per year to pay VA state income taxes.
In addition, any unexpended portion may be transferred to another Virginia taxpayer (in other words tax credits can be sold for cash). A recent tax court opinion suggests that the income from the sale of tax credits held for more than one year prior to sale may receive more favorable long-term capital gains treatment. Check with your tax advisor or attorney to determine whether and when tax credits should be sold.
For a fee of generally 6% of the credits sold, tax credit facilitators (essentially brokers) will help easement donors to market credits at 89-91 cents on the dollar. The New River Land Trust can provide easement donors with a list of facilitator; however, at no cost, landowners can recruit buyers themselves or work with the New River Land Trust to find buyers at 90 (average in 2016) cents on the dollar.
Other things to note, the state:
- Will only register $75 million a year in state tax credits. Any tax credits that can’t be registered in a given year will be carried over to the next year.
- Will charge a transfer fee paid to the Dept of Tax of 5% of the value of the credits transferred.
- Has an additional review and verification process for all easements with a tax credit valued at $1 million or more.
III. Federal Estate Tax Reduction and Exclusion:
Extinguishing the bulk or all of the development rights for a parcel of land through a conservation easement may reduce the value of the land for estate tax purposes, thus reducing the estate taxes, potentially substantially. In addition, Section 2031(c) of the Internal Revenue Code provides an estate tax exclusion from the gross estate of up to 40% of the remaining encumbered value of the land (but not improvements on the land) protected by a qualified conservation easement.
The exclusion is capped at $500,000 and is reduced if the conservation easement reduced the land’s value by less than 30% at the time of the contribution. To qualify the easement must prohibit all but “de minimis commercial recreational use.” There are exceptions, so check with your tax advisor. “If you don’t do the planning, UNCLE SAM is going to tell your heirs what to do with that real estate and they aren’t going to like what they hear.
– Stephen Small, tax attorney
IV. Property Taxes
Land under easement is taxed at its “land use” value in counties with land use assessment. In counties such as Grayson County, which do not have land use taxation, the property must be assessed at its restricted value, thus lowering your county property taxes.
The combined tax savings and cash generated by a conservation easement can be a considerable benefit.
“For the first time in 25 years of farming, I needed a savings account,” said one Floyd County farmer.
In order to be tax-deductible, the easement a) must be given in perpetuity; b) must be given to a qualified government agency or non-profit organization; c) must have a qualified appraisal; and d) must be donated exclusively for “conservation purposes” (in other words, the property must have some significant natural, environmental scenic, historic, scientific, recreational, or open space value).
For further information please contact John R. Eustis at email@example.com or by calling  951-1704. As always, NRLT strongly urges prospective easement donors to consult their own financial and legal advisors.