Farm and ranch landowners may consider conservation easements to preserve operating capital and improve cash flow. If handled properly, donating or selling these easements to a land trust, public conservancy, or other qualified entity can be financially beneficial.
According to the Land Trust Alliance, more than 20 million acres of land are under easement as of 2020.
Is a conservation easement right for you?
A charitable deduction for an easement reduces your taxable income—money you can put back into your business. When donating to a qualified charity, a donor may generally deduct up to 50% of their adjusted gross income.
Taxpayers who don’t use the full amount of the charitable deduction in the year they donate can carry the deduction forward for five years. This will offset future taxable income. The tax benefit expires after five years.
Farmers and ranchers who donate easements receive enhanced tax benefits. The value of their contribution may offset 100% of their adjusted gross income. These donors may carry unused deductions forward for 15 years.
What are the IRS requirements for a conservation easement?
The tax code and IRS publications define specific qualifications for conservation easements:
- Obtain an appraisal from a licensed appraiser—preferably one who has performed appraisals for conservation easements. An appraisal is essential because the charitable deduction is based on the property’s value with and without restrictions imposed by the easement. In other words, the value of the charitable deduction is the difference in the fair market value of the property with and without the easement restrictions.
- Obtain written acknowledgment from the donee organization, such as the land trust, at the time of donation. This acknowledgment describes the property contributed. It also affirms that the donor received no compensation or stipulates any benefit received in exchange for the contribution.
- Complete a baseline study. This study documents the resources in place and the property’s condition at the time of the contribution.
- Submit Form 8283 with the donor’s federal income tax return. This form, with attachments, reports the value of noncash charitable contributions deducted from the return.
Does a conservation easement impact audit risk?
Auditors will scrutinize donors’ stated land values before and after easement restrictions since these values establish the amount of the charitable deduction. It’s essential to obtain a third-party appraisal to establish that these values are free from donor bias.
Aldrich Insights
If you’re considering donating a conservation easement for tax planning or succession planning, consult with your business advisors. These include your tax advisor, estate planning attorney, lender, insurance professional, and financial advisor—anyone you’ll rely on to structure the transaction efficiently to achieve your goals.
Your Aldrich Advisor is here to help you navigate the process of donating a conservation easement—let’s talk.
