BENEFITS OF DONATING A CONSERVATION EASEMENT
The main reason landowners donate a conservation easement is because they love the land and they want to preserve the natural open space, habitat and agricultural value of their land forever. A conservation easement donation also may qualify a landowner for significant estate tax savings and income tax deductions and credits.
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 perpetual, held by a “qualified conservation organization,” such as the Land Preservation Trust and serve a valid “conservation purpose”. This means the property must have significant natural, scenic, historic, scientific, recreational or open space value. If a landowner donates an easement that meets IRS rules, they may be able to claim a charitable donation of up to 50 percent of their adjusted gross income. Excess deductible amounts can be carried forward for 15 additional years or until the appraised amount of the easement has been used up - whichever comes first.
STATE INCOME TAX CREDIT: Maryland law allows a tax credit to be taken against state income taxes by an individual who donates a conservation easement. The credit is capped at $5,000 yearly for each individual owner of the property upon which the easement is donated. Tax advantages may differ between individual landowners, institutions, and other legal entities. Generally, if a husband and wife own the property both may claim a $5,000 annual credit. This credit can be carried forward 15 years after the initial year it was taken or until the easement value has been exhausted – whichever comes first. Each owner of an undivided interest in the property may be eligible to take this state income tax credit. To qualify for this credit, the easement must be perpetual and conveyed to the Maryland Environmental Trust (MET) or co-held by MET and a local land trust such as the Land Preservation Trust, the fair market value of the easement must be substantiated by an appraisal and the landowner may not claim a state income tax deduction and a state income tax credit for the same easement donation.
ESTATE AND INHERITANCE TAX: For landowners who will leave sizeable estates upon their death, the most important financial impact of a conservation easement may be a significant reduction in estate taxes. Estate taxes make it difficult for heirs to keep the land intact because of the high development value of land and high estate taxes. This makes it an unfortunate situation for heirs who have to subdivide or sell the land in order to pay the estate taxes – which may not be the desire of the deceased landowner or their heirs. A conservation easement provides significant help in several ways:
Reduction in Value of Estate: The estate will be reduced by the value of the donated conservation easement. As a result, estate taxes will be lower since the heirs will only have to pay estate taxes on the preserved value – not the full development value – of the property.
Estate Exclusion: When property has a qualified conservation easement placed upon it, up to an additional 40 percent of the land value (capped at $500,000) may be excluded from the estate when the landowner passes away. For example, if the “before” easement value is $1.5 million and the “after” easement value is $1 million, an additional $400,000 (40 percent of the “after” easement value) can be subtracted from the taxable estate. The descendant or a member of his family must have been the easement donor and owned the land for at least three years prior to the descendant’s death.
Post-Mortem or After Death Easement: Heirs may receive these benefits by choosing to donate a conservation easement after the landowner’s death. The representative of the estate must decide whether to elect the exclusion on or before the due date of the estate tax return.
WHO WILL ACCEPT A DONATED EASEMENT?
Maryland Environmental Trust – The Maryland Environmental Trust is the statewide organization that accepts donated conservation easements. MET currently holds easements on more than 100,000 acres. While MET prefers easements of more than 25 acres they will consider smaller easements that comply with their small easement acceptance policy. Only easements accepted by MET are eligible for state property and income tax credit.
Land Preservation Trust - More than 340 properties covering 12,100 acres are currently protected by LPT. The easements accepted by the Land Preservation Trust are eligible for federal and state income tax deductions.
The information contained here is only an overview of the major Internal Revenue Code requirements, Treasury Regulation and associated guidance documents as they relate to easement valuations and appraisals. This is not a comprehensive listing or explanation of all requirements for obtaining a Federal Income tax deduction. The explanation of complex tax issues provided in this fact sheet has been greatly simplified. For more detailed information, you should seek professional council from your attorney and accountant. LPT cannot ensure the deductibility of a conservation easement donation.
For more information, additional resources, or a confidential consultation please contact Ned Halle at 410-771-9900 , or Ann Jones at 443-690-9420 email@example.com.