Tax Benefits of Conservation Easements
A donation or bargain sale of a conservation easement can earn you significant federal, state, and local tax benefits. Some donors benefit from thousands of dollars in tax savings, as well as the peace of mind that their land is protected.
Tax benefits are based on the value of a conservation easement donation, which is determined by a qualified appraisal. The easement value equals the fair market value of the land before the easement minus the fair market value of the land after the easement. In the case of a bargain sale, tax benefits are based on the amount of the easement value for which you were not paid (the value donated).
Hypothetical Easement Valuation
- Appraised Land Value before Easement: $2,000,000
- Appraised Land Value after Easement: $800,000
- Value of Conservation Easement: $1,200,000
In this very simple example of a donated easement, the owner is donating the $1.2 million dollar easement value and may be eligible for income, estate and other tax benefits for this amount.
Potomac Conservancy cannot guarantee that landowners will be eligible for tax benefits, and we urge you to seek legal and financial advice regarding tax benefits. Tax rules can —and do— change; get up-to-date information from a tax advisor.
Below is a brief summary of conservation tax incentives.
Federal Tax Incentives
Federal Income Tax Deduction: A landowner who donates a conservation easement that satisfies IRS income tax regulations may deduct the amount of the appraised value of the conservation easement from his or her income, thereby reducing their tax rate. As of tax year 2015, the deduction may be up to 30% of adjusted gross income. If the entire appraised donation value is not used within the first year, the remaining amount may be carried forward at 30% of adjusted gross income for an additional five years or until the donation is fully expended (whichever comes first). The cost of the appraisal and other easement expenses, such as surveys, may also be deductible since they are associated with the donation. IRS Form 8283 must be filed, with the required documents, to obtain this deduction. (An enhanced federal deduction was available from 2006 through 2014, but has now expired.)
Federal Estate Tax Exclusion: This tax incentive is key for landowners who plan to pass their land to their children. The property’s value to the estate may be reduced just by the conservation easement, but in addition, up to 40% of the value of the property (up to $500,000) can be excluded from the estate for the purposes of calculating estate taxes.
State and Local Tax Incentives
Maryland Income Tax Credit: Landowners who donate a conservation easement to the Maryland Environmental Trust and a local land trust, such as the Potomac Conservancy, can receive an income tax credit of up to $5,000 per landowner ($10,000 per couple) per year and can be carried forward for up to 15 years for a maximum of $80,000.
Maryland Property Tax Credit: A landowner will pay no property tax on land that is subject to an easement for 15 years from the date of the donation. At the end of this period, the land will be assessed at the highest agricultural rate (even if the property is not farmed).
Virginia Income Tax Deduction: The conservation easement deduction taken on your federal tax return (explained previously) results in the same reduction of taxable income for Virginia income tax purposes. For those selling easements, profits from an easement sale can be excluded from Virginia taxable income.
Virginia Income Tax Credit: A full 40% of the appraised value of a donated conservation easement can be used as a credit towards Virginia state income tax. You may use up to $100,000 in any one year, and any unused portion may be carried forward for 10 consecutive years. Unused portions can be sold or transferred to another Virginia taxpayer. A tax credit broker can help you with this process.
Virginia Capital Gains Tax Exclusion: Land encumbered with an open-space conservation easement is exempt from Virginia capital gains tax.
Local Property Tax Reduction: Virginia property tax is based on a property’s “highest and best use” value, which is frequently a developed use. Conservation easements often reduce property taxes by restricting the use of the property and thereby reducing the value of the property’s “highest and best use.”
Virginia Riparian Buffer Tax Credit: Virginia landowners can take a tax credit on 25 percent of the value of the timber retained as a buffer along stream- and river-side areas from 35 to 300 feet in width. The credit is limited to $17,500 and the buffer must be retained for 15 years. To qualify, the landowner also must have a Forest Stewardship Plan.
West Virginia Income Tax Deduction: The conservation easement deduction taken on your federal tax return (explained previously) results in the same reduction of taxable income for West Virginia income tax purposes.
Local Property Tax Reduction: West Virginia property tax is based on a property’s “highest and best use” value, which is frequently a developed use. Conservation easements often reduce property taxes by restricting the use of the property and thereby reducing the value of the property’s “highest and best use.” West Virginia law states that conservation easement properties must be assessed, for property tax purposes, at the rate of agricultural land, whether or not the land is in agricultural use. Landowners of conservation easement land need not reapply each year for the agricultural land use rate. The benefit is automatic. If your property is not enrolled automatically, see your County Assessor.
Local Property Tax Reduction: Most local governments will reduce property taxes after a conservation easement is placed on a property, recognizing that maximum use of the property has changed, thereby lowering the property tax.
For more information, contact our Shenandoah Resource Center at 540-667-3606 or email@example.com, and consult your attorney or accountant.