Federal Income Tax Deduction
The federal income tax benefits of donating a conservation easement are like those of other charitable contributions. A landowner may deduct up to the full value of the conservation easement from their federal income taxes.
Tax laws require that a qualified appraiser determine the conservation easement’s value.
If the conservation easement meets IRS criteria, the landowner may deduct the full value of the conservation easement donation from their adjusted gross income, up to 50% of the landowner’s income for the year of the gift.
If the donation exceeds this amount in the year of the donation, the donation balance may be deducted for up to 15 succeeding years, subject to the same 50% limitation. However, qualifying farmers and ranchers can deduct up to 100% of their income.
Definition of a Farmer or Rancher
A farmer or rancher is someone who receives more than 50% of their income from the trade or business of farming. The law references an estate tax provision (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.
- 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 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 or silviculture.
A landowner with a $100,000 adjusted annual income might donate a conservation easement worth $575,000 to a land trust. The landowner could deduct 50% of his or her $100,000 income, or $50,000, in each of years 1 through 11 and the remaining $25,000 in year 12. One can never deduct more than the fair market value of the gift.
Phasing the Deduction over Time
Conservation easements may be phased on portions of a property over time, should the value of the charitable donation exceed a landowner’s ability to use the income tax deduction over the allowed 16 years. Subject to certain limitations, some of the expenses incurred by a landowner in the donation process, including the costs for appraisals, baselines, surveys, legal review, and title insurance, can also be tax deductible.
Federal Estate Tax Deduction
To calculate the value of inherited property for estate taxes purposes, federal law requires that the value of the land be based on that property’s “highest and best use” instead of actual use.
For example, a landowner might own a small family farm near a growing city which might be more valuable as residential development. When the landowner dies, taxes on the property will be based on the land’s value as potential home sites, even if the heirs do not intend to develop the land for home sites.
| Estate Value | Estate Taxes Due (2022) |
|---|---|
| $2,500,000 | 0 |
| $5,000,000 | 0 |
| $7,500,000 | 0 |
| $10,000,000 | 0 |
| $12,500,000 | $135,400 |
| $15,000,000 | $1,121,800 |
| $17,500,000 | $2,121,800 |
| $20,000,000 | $3,121,800 |
A conservation easement can place restrictions on the use of a property that limits its “highest and best use.” Because the property’s “highest and best use” is restricted, its value and estate taxes are reduced accordingly. As noted earlier, there are limits on the income tax deduction for a conservation easement donation, but there are no such limits for estate tax purposes. Therefore, the savings on estate taxes can be substantial.
A widowed landowner purchased property 30 years ago that has appreciated significantly. The property, located near a growing suburban community, has a current fair market value of $3,500,000. The landowner donates a conservation easement to a local land trust that reduces the property’s value to $500,000. Assuming the landowner has $500,000 in taxable assets in addition to the property and that no prior taxable gifts have been made, the effect of the conservation easement on estate taxes for heirs would be as seen in the table above.
| Without Easement | With Easement | |
|---|---|---|
| Land Value | $3,500,000 | $500,000 |
| Other Valuable Assets | $10,000,000 | $10,000,000 |
| Total Taxable Estate | $13,500,000 | $10,500,000 |
| Total Federal Estate Taxes | $521,800 | 0 |
In the states of Arkansas, Kentucky, Louisiana, Mississippi, Missouri, and Tennessee, landowners can deduct the full value of the conservation easement from their income taxes.
Conservation easements may reduce property taxes. However, property taxes on agricultural land are reduced because they are based on a property’s productivity rather than fair market value.
Conservation easements on land not classified as agricultural may reduce property taxes to the extent the value of the land is reduced. However, property taxes are determined by the county or parish tax assessor/collector.
Learn about Conservation Easements
Conservation Easements:
A Handbook for Landowners in the Lower Mississippi River Valley
This handbook is the guide for landowners in the Lower Mississippi River Valley who are interested in learning more about conservation easements. It provides background knowledge about easements, information about the steps involved, the tax benefits of conservation easements, and more about setting up a conservation easement.