Kansas Land Trust
Tax Benefits of Conservation Easements

IMPORTANT INCREASES TO TAX INCENTIVES
Family farmers, ranchers, and other moderate-income landowners can now obtain a significant tax benefit for making the charitable donation of a conservation easement.

On August 3, 2006 the Congress approved a tremendous expansion of the federal conservation tax incentive for conservation easement donations. On August 17, the President signed it into law. This is a great victory for conservation!

The victory is due in large part to the work of individuals from hundreds of land trusts across the country, who made this a local issue for their Senators and Representatives. Thank you!

The new law:

  • Raises the deduction a landowner can take for donating a conservation easement from 30% of their income in any year to 50%;
  • Allows qualifying farmers and ranchers to deduct up to 100% 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.
It is also important to note that this only applies to easements donated in 2006 and 2007.

TAX SAVINGS
Generated by Gifts and Donations to a Land Trust

Gifts to the Kansas Land Trust can help protect beautiful lands while enabling the givers to realize tax benefits. A summary follows of tax-saving gift arrangements and ideas to consider for financial and estate plans.

Income Taxes and Outright Gifts

Outright cash gifts are the simplest way of gaining tax deductions while supporting the Kansas Land Trust. However, donations of other assets such as real estate, securities, or life insurance may be more appropriate.

Donated real estate such as homes, vacant lots, or commercial and industrial properties, may be sold-with development restrictions, if appropriate, with the proceeds used to further the goals of the Kansas Land Trust. Gifts of appreciated real estate held long-term may entitle a property owner to an income tax deduction for its full fair market value, subject to certain limitations.

Income Taxes and Donations of Conservation Easements

Real estate that meets KLT's criteria would be protected in its natural state, or according to terms and conditions outlined in a conservation easement. Potential federal income tax benefits vary with the particulars of each donation. Essential points to consider are the following:

  • Qualified Conservation Organization: The easement must be granted to a qualified conservation organization, such as the Kansas Land Trust, or a public agency charged with overseeing land conservation or historic preservation programs.
  • Conservation Purposes: An easement must be granted exclusively for conservation purposes such as preservation of natural habitats or resource lands, historic sites, unique scenic landscapes, wildlife corridors or connections to other preserved parcels, areas of concern for public education or recreation, open spaces in the vicinity of intense land development, or land for farming or ranching. In general, the maximum allowable deductions arise from conservation easements donated over large tracts of open space in areas where development pressures are intense.
  • Internal Revenue Code 170(h) defines "conservation purposes" to include the following:
    • the preservation of land areas for outdoor recreation by, or the education of, the general public,
    • the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem,
    • the preservation of historically important land areas or certified historic structues
  • Permanence: The easement must be granted in perpetuity.
  • Amount of Deduction: The amount a property owner can deduct for a donated easement generally equals the reduction in the property's value due to the easement (the difference between the property's independently appraised value before the easement is granted and after the easement's restrictions take effect).
  • The amount of a deduction that may be claimed by a donor in any taxable year generally will be limited to a percentage of the donor's adjusted gross income for that year and may be carried for a number of years after the year of the donation until the deduction is fully used. Note: A deduction claimed for a donation of a conservation easement affects a donor's basis in the subject property.
  • The amount of a deduction that may be claimed by a donor in any taxable year generally will be limited to a percentage of the donor's adjusted gross income for that year and may be carried for a number of years after the year of the donation until the deduction is fully used. Note: A deduction claimed for a donation of a conservation easement affects a donor's basis in the subject property.
  • Appraisals: The appraisal that determines the easement value must meet strict federal substantiation requirements as specified in federal tax law regarding conservation easements.

Estate Taxes

State and federal inheritance taxes on unrestricted land are often so high that heirs are forced to sell some or all of the land just to pay these taxes. Because a conservation easement can reduce the market value of the property by reducing its development potential, inheritance taxes are also reduced.

If the property owner has restricted the property by a perpetual conservation easement before his or her death, the property must be valued in the estate at its restricted value. To the extent that the restricted value is lower than the unrestricted value, the value of the estate will be less, and the estate will thus be subject to a lower estate tax, and another beautiful piece of land will have been saved.

1997 tax act put in place an added incentive for easement donations in certain areas, such as those affected by urban sprawl or those surrounding national parks. A tax advisor can help determine whether an easement on a certain parcel of land would qualify for this additional estate tax benefit.

A conservation easement can be devised (donated) as part of a will and then deducted from the taxable estate. The negotiation of the easement should occur prior to inclusion in the will. In addition, a 1998 tax act allows heirs to donate a conservation easement on inherited lands.

Gift Taxes

When a gift of land is made to a family member or other person, it is subject to federal gift taxes if its value exceeds the maximum tax-free amount. A reduction in the value of the property through a conservation easement may allow a landowner to give more land in any one year without creating a gift tax obligation, or it may help reduce the amount of gift tax owed.

Local Real Property Taxes

Local real property tax assessments are based on a property's fair market value, which considers the property's development potential. If a conservation easement reduces the development potential of the property and limits its use, then the level of assessment and, accordingly, the amount of real property taxes, may be reduced.

Tax laws change

A lawyer or tax planner will have access to further details. Professional financial counsel is essential, because each donor's tax situation is unique.

ESTATE PLANNING


Protecting Family Lands

Land can be valuable in many ways. To an investor, the value of a parcel of land is in the profit to be made from its sale. To an owner of commercial property, the property's value is in the rents which can be collected for its use. But to some, the value of land is more deeply rooted: in family memories and commitments; in a clearing by a brook or on a wildflower prairie hilltop; in the goodness which land has brought to human lives. There is thus a bond between people and land, a bond which can be passed on from generation to generation. However, the ownership of prime property as a family asset creates the need for careful and specialized estate planning.

Due to the dramatic increase in property values in many areas in recent years, a family of otherwise modest means may own land of considerable appraised value. Upon the death of the last surviving parent, the heirs may face the obligation to pay state and federal estate taxes without having the financial resources to meet that obligation. Their only recourse may be to sell all or part of the land that was left to them, despite their own desires and the expressed wishes of their parents. In short, the failure to plan for the future of valuable family land after death may grant control over that land to the taxing agencies of government. Fortunately, there are alternatives.

The Conservation Easement

By reducing the appraised value of land, the donation of a conservation easement to the Kansas Land Trust can reduce estate taxes. If the appraised value is reduced sufficiently, estate tax obligations can be avoided altogether. Since most of the appraised value of land is in its potential for development, the donation of development rights to KLT leaves only the remaining value as taxable. Thus, the donation of a conservation easement can protect land in two ways.

First, it protects the conservation values of the land according to the specific restrictions contained in the conservation easement. And, second, it might protect the integrity of the land from the threat of sale to satisfy estate taxes. Furthermore, this protection option can reduce income and property taxes for the current title-holders while still living.

Since each conservation easement is individually written to address both the personal needs and the intentions of the donating landowner, land protected by a conservation easement can continue to be used by the donor's heirs as the family has been accustomed. A family farm, for example, can be used, in perpetuity, for the production of crops and the pasturing of livestock. And, every bit as important, it can provide a home for the future generations of the family which has cared so deeply about its farmland.

A conservation easement can be donated via a will. It has the same effect on estate taxes as a lifetime donation. The negotiation of the easement should occur prior to inclusion in the will. In some circumstances, heirs may be able to reduce estate taxes by increasing an easement's restrictions or by placing a new easement on land passed down in an estate.

Gift of a Remainder Interest

In some instances, a landowner may wish to donate ownership of land to a land trust, while retaining the right to use the land until death. The act of making the donation of the land prior to death, to take effect after death, is called a gift of a "remainder interest," and the retained right of use is called a "life estate." Ownership is relinquished upon death. In some instances, the combined gift of a conservation easement with a remainder interest may address the needs and desires of a landowner.

Donating Land By Will

Donating ownership of land by will enables a landowner to own and control land during his or her lifetime and assure its protection after death.

Land Donations That Establish a Life Income

With a charitable gift annuity, a landowner transfers certain property to a land trust, and the organization agrees to make regular annuity payments to specified beneficiaries for life. This gift of land usually qualifies for a charitable income tax deduction at the time of the gift, based on the value of the land less the expected value of the annuity payments.

Another income option is a charitable remainder unitrust. Land is placed in a trust account, with a conservation easement, if it is to be protected. The trustee sells the land and invests the proceeds of the sale. Specified beneficiaries receive annual payments for a fixed term or for life. Then, the trustee delivers remaining funds in the trust over to the land trust. This type of gift qualifies for a charitable income tax deduction when the land is put in the trust account, based on the value of the land less the expected value of the payments.

Charitable gift annuities and charitable remainder unitrusts are most useful for highly appreciated land, the sale of which would incur high capital gains tax.

Estate Planning Without Land

Even without donating a conservation easement or land, friends of the Kansas Land Trust can help protect land for future generations. This can be accomplished by including a donation to the Kansas Land Trust in a will, whether money, securities, real estate, or other valuables. This type of gift will live forever in the land that it helps to protect.

Formalization of any protection plan must be guided by an attorney and a tax planner experienced in estate planning.
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