SERVICES - Facilitate Conservation Easement Donations - Income & Estate Tax Incentives
The enhanced tax incentive for donations of conservation easements has expired. All requirements for donations of conservation easements remain the same as they were in 2009, but the maximum deduction for such a donation is limited to 30% of an individual's adjusted gross income (AGI) in the year of the donation, with the remainder of the donation being carried forward for a maximum of 5 additional years. Deductions by C-corporations are limited to 10% of AGI.
The "S-corp fix" has expired. Charitable deductions by S-corporation shareholders will, again, be limited to their basis in the donated property. Given the long holding periods of many farm properties, this change could severely limit the ability for S-corporation shareholders to deduct the full value of donated land or easements. A one-year extension of the "S-corp fix" was included in the House "extenders" package and we're hopeful it will be extended, along with the easement incentive, in early 2010.
The Land Trust Alliance fully expects that Congress will try to reinstate the enhanced deduction for easement donations in 2010,
and to make the incentive retroactive to January 1st. Both House and
Senate leaders say they will do this early in 2010 -- but the
Congressional schedule is not predictable, particularly in the bitterly
partisan atmosphere LTA says we can expect to continue for some time. This
is why we need to keep up our work to make this deduction permanent, so
that Congress understands the importance of getting this done, and so
that potential easement donors know what the law will be during the
long time it takes them to plan a donation.
If someone donated an easement sometime in 2006-2009, they can continue to deduct 50% of their AGI per year (or, if they are a qualified farmer or rancher, 100%), and carry over unused amounts of their donation for 15 years. What counts is what the law was at the time they made their donation. So, if you donated in 2009, and you are filling out your tax forms in 2010, you get the 50 or 100% AGI deduction and 15 year carryover. Make sure your tax preparer gets this right, because the folks who write computer programs for tax professionals (as well as for you and me) have a hard time keeping up with changes in the law!
LTA's basic legislative strategy remains unchanged and we still need help educating Senators and Representatives. LTA's bill to make the enhanced easement incentive permanent is still alive, with the same co-sponsor lists and bill numbers. Additional co-sponsors for S. 812 and H.R. 1831 help! So does thanking existing co-sponsors and encouraging them to get a permanent incentive included in legislation renewing expired tax provisions, the estate tax package, or another tax bill, ASAP. For the latest information and resources, please visit: www.lta.org/easementincentive.
Congress extended, through 2009, a Federal tax incentive for conservation easement donations that has helped thousands of landowners conserve their land.
If you own land with important agricultural or natural values, donating a voluntary conservation easement (also called conservation agreement) can be one of the smartest ways to conserve the land you love, while maintaining your private property rights and possibly realizing significant federal tax benefits.
This information summarizes the conservation easement tax incentive and provides answers to some frequently asked questions.The incentive (when it is in effect - see above for the latest news):
- Raises the deduction a donor can take for donating a conservation easement from 30 percent of his or her income in any year to 50 percent;
- Allows qualifying farmers and ranchers to deduct up to 100 percent of their income; and
- Extends the carry-forward period for a donor to take tax deductions for a voluntary conservation agreement from 5 to 15 years.
is important to note that the incentive only applies to easements
donated between 2006 and 2009. GRVLT will work with the Land Trust
Alliance to make this change permanent, but as it stands it will expire
at the end of 2009.
How does the Expanded Tax Incentive work?
1. Can you give me an example of the difference the new change makes?
Under the previous rules, a landowner earning $50,000 a year who donated a $1 million conservation easement could take a $15,000 deduction for the year of the donation and for an additional 5 years—a total of $90,000 in tax deductions.
The new rules allow that landowner to deduct $25,000 for the year of the donation and then for an additional 15 years. That’s a total of $400,000 in deductions. If the landowner qualifies as a farmer or rancher, he could take a maximum of $800,000 in deductions for his million dollar gift.
2. Can anyone deduct more than the value of his or her gift?
One can never deduct more than the fair market value of the gift. This change simply allows landowners who previously could not deduct the full value of their gift to deduct more of that value.
The new law defines a farmer or rancher as someone who receives more than 50 percent of his or her gross income from “the trade or business of farming.” The law references an estate tax provision [Internal Revenue Code (IRC) 2032A(e)(5)] to define activities that count as farming. Specifically, those activities include:
- Cultivating the soil or raising or harvesting any agricultural or horticultural commodity (including the raising, shearing, feeding, caring for, training, and management of animals) on a farm;
- Handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of the commodity so treated; and
- The planting, cultivating, caring for, or cutting of trees, or the preparation (other than milling) of trees for market.
The qualified farmer or rancher provision also applies to farmers who are organized as C corporations. For an easement to qualify for the special treatment, it must contain a restriction requiring that the land remain “available for agriculture.” IRS guidance on these parts of the law is available at www.lta.org/policy/tax-policy/.
4. Do these changes apply to gifts of land?
This expanded incentive does not apply to gifts of land in fee; it only applies to gifts that qualify under IRC 170(h)(2), such as conservation easements. A landowner considering donating their land should consult with an attorney to determine whether they should consider changing the structure of their gift to take advantage of this new incentive.
5. Does this incentive only apply to conservation easements?
The expanded incentive applies to all donations covered in IRC section 170(h)(2), which includes donations of the entire interest of the donor other than a qualified mineral interest; a remainder interest; or a permanent conservation or historic preservation easement.
6. What is the timeline for this expanded incentive?
The incentive applies to all easements donated between 2006 and 2009. The Alliance will work hard to make this change permanent, but as it stands it will expire at the end of 2009. If a donor qualifies under this provision, they can continue to apply its formulas to the amount of their contribution that they carry over into years beyond 2009.
7. What other restrictions apply?
Conservation easement donations are subject to the same restrictions as they were before. For example, easements must meet the “conservation purposes” test defined in the existing law; they cannot be donated as part of a “quid pro quo” agreement where the easement was given in exchange for something else, such as a building permit; and they must be donated to a qualified organization—a governmental unit or a publicly supported charity that has “a commitment to protect the conservation purposes of the donation, and…the resources to enforce the restrictions.”
See www.lta.org/policy/tax-policy/ for the Treasury Regulations on conservation easement donations.
8. Will donors who use this provision be audited?
Taking advantage of this new law will not necessarily affect one’ s likelihood of being audited. All donors should note, however, that the IRS has greatly increased the number of tax returns it audits. The IRS has also indicated that high value donations of property—including donations of conservation easements—will receive more attention from the IRS than most tax returns.
That makes it particularly important for a donor to know and follow the law; to utilize a reputable professional appraiser who has experience in the appraisal of conservation easements; and to donate to a well-established reputable land trust that has adopted and implemented Land Trust Standards and Practices.
Recent Rules affecting easement donors
1. How do other new laws affect easement donations?
A 2006 law (PL109-280) redefines who is a “qualified appraiser,” and gives the IRS the power to issue new regulations on appraiser qualifications. This is important: appraisers need to show donors that they are qualified under the new law and any new Treasury Regulations or guidance that may follow from it. The law states that a qualified appraiser must “demonstrate verifiable education and experience in valuing the type of property subject to the appraisal.”
2. How does the law affect easements that protect both conservation and historic preservation values?
The 2006 law tightened the rules for easements on “certified historic structures.” If you are protecting a property that includes such a structure (e.g., a farm with a historic stone barn that is listed in the National Register) these new regulations may apply to you. Donors and donees of easements protecting historic structures need to understand the 2006 rules, which include a filing fee for donors and specific appraisal requirements.
3. Have there been other recent changes affecting easement donations?
Yes! The IRS has changed the instructions for Form 8283, and now asks for additional information from easement donors.