Tax Benefits From A Conservation Easement Donation
I. Estate and Inheritance Tax:
For landowners who will leave sizable estates upon their death, the most important financial impact of a conservation easement may be a significant reduction in estate taxes. Estate taxes often make it difficult for heirs to keep land intact and in the family because of high estate tax rates (39%-55%) and high development value of land. It may be necessary to subdivide or sell land for development in order to pay these taxes. This may not be the desire of the landowner or their heirs. A conservation easement can often provide significant help with this problem in three important ways:
- Reduction in Value of Estate
The deceased’s estate will be reduced by the value of the donated conservation easement. As a result, taxes will be lower because heirs will not be required to pay taxes on the extinguished development rights. In other words, heirs will only have to pay estate taxes on preserved farmland values, and not full development values.
- Estate Exclusion
A 1997 federal law provides further estate tax incentives for properties subject to a donated conservation easement. When property has a qualified conservation easement placed upon it, up to an additional 40% of the value of land may be excluded from the estate of when the landowner dies. This exclusion is in addition to the reduction in land value attributable to the easement itself and described above.
- After Death Easement
Heirs may also receive these benefits by electing to donate a conservation easement after the landowner’s death and prior to filing the estate return. Easements can be an effective way to protect heirs from estate taxes, insure that the family can own and enjoying the land, and protect the land from future unwanted development.
II. Property Tax Credit:
Properties protected by a qualified conservation easement in the state of Maryland are eligible for two separate property tax benefits. When the Maryland Environmental Trust (MET) has agreed to accept the conservation easement, the unimproved land protected by the conservation easement is exempt from all state and local property taxes for 15 years (see Maryland Property TaxLaw section 9-107). MET is a statewide land conservation organization that acts in partnership with the ESLC to protect lands on the Eastern Shore.
After the 15-year credit is exhausted, conservation easement properties must be assessed as open space properties (see Maryland Property Tax Law section 8-219). This means that these properties will be assessed at farmland rates, regardless of surrounding market forces, underlying zoning, or whether the land is actually farmed.
III. Federal Income Tax Deduction
Donation of a qualified conservation easement constitutes a charitable gift that may be deductible by the landowner for federal and state income tax purposes. The value of the easement gift, as determined by a qualified appraiser, equals the difference between the fair market value of the property before and after the easement takes effect.
To qualify for this income tax deduction, the easement must be: a) perpetual; b) held by a “qualified conservation organization” like the Eastern Shore Land Conservancy; and, c) serve a valid “conservation purpose,” meaning the property must have a significant natural, scenic, historic, scientific, recreational, or open space value.
If a landowner executes an easement meeting IRS rules, the landowner may be able to claim a deduction in an amount of up to 30% of their adjusted gross income (in certain cases a 50% deduction is possible). Excess deductible amounts can be carried forward for 5 additional years (allowing a maxi-mum of 6 years within which the deduction may be utilized), or until the amount of the deduction has been used up, whichever comes first.
|Federal Income Tax Deduction: A Simple Example.An Eastern Shore property has a Market Value of $950,000 before the easement donation and $500,000 after the donation. As a result, the easement value if $450,000 ($950,000 – $500,000). The gift of an easement valued at $450,000 will generate a potential federal income tax savings for a donor in the 36% income tax bracket of $162,000 ($450,000 x 36%).|
IV. State Income Tax Credit:
Maryland law allows a tax credit to be taken against state income taxes by an individual donating conservation easement after July 1, 2001. The credit is capped at $5000 per year for each individual owner of the property upon which the easement was donated. The deduction can be carried forward for 15 years after the initial year it is taken. Below are some important facts regarding the Maryland income tax credit:
|The explanation of complex tax and land planning issues provided in this fact sheet has been greatly simplified. For more detailed information and to ensure that a conservation easement donation will qualify for the described tax deductions in your particular situation, you are encouraged to seek professional counsel. Eastern Shore Land Conservancy staff cannot assure the deductibility of an easement donation.|
- The easement must be perpetual and conveyed to the Maryland Environmental Trust or the Maryland Agricultural Land Preservation Foundation (MALPF);
- The fair market value of the easement must be substantiated by an appraisal and the credit shall be reduced by the amount of any payment received for the easement;
- You may not claim a state income tax deduction and a state income tax credit for the same easement donation; and,
- Easements donated prior to July 1, 2001 do not qualify for this deduction, but past easement donors may elect to further restrict their property and receive a tax credit equal to the value of the additional restrictions.