What are the federal tax benefits associated with a conservation easement?
The federal income tax benefits of donating a conservation easement are similar to those of making other tax-deductible gifts of real property but are subject to some unique requirements. To meet the additional criteria for the tax deduction, an easement must be donated to a qualified organization for a qualified conservation purpose, such as:
1. The preservation of land areas for outdoor recreation by, or the education of, the general public,
2. The protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem,
3. The preservation of open space (including farmland and forest land) where such preservation is -
a. For the scenic enjoyment of the general public, or
b. Pursuant to a clearly delineated Federal, State, or local governmental conservation policy, and will yield a significant public benefit, or
4. The preservation of an historically important land area or a certified historic structure.
A person "donating" a qualified conservation interest may deduct the appraised value of the easement from their adjusted gross income, provided that the deduction does not exceed 30% of their adjusted gross income in the year of the gift. Any excess balance of the deduction may be carried over for up to five succeeding years, subject to the same annual 30% limitation. (IRC Section 170).
The appraised value of the easement is the difference between the value of the land with the easement and without the easement.
Section 2031(c) allows executors to exclude from federal estate tax the value of the land encumbered by a qualified conservation easement. The law also allows beneficiaries to exclude from the taxable estate 40% of the value of the land subject to qualifying conservation easements.
Section 2031 also provides that an executor or trustee can elect to "donate" a qualified conservation easement after the death of the decedent thereby reducing the value of the land subject to the estate tax and allow the estate to be eligible for the Section 2031(c) exclusion.