Unprecedented Tax Benefits For Land Conservation

Landowners conserve their farms, forests, scenic mountainsides and trout streams because they care about their land and their heritage. To reward this conservation, the federal and state governments now offer thousands of dollars in tax deductions, tax credits and estate tax savings as an incentive to save Virginia’s natural heritage.

A conservation easement: A qualifying easement must be forever, must be held by a qualifying government agency or non-profit organization and must conserve a valid conservation purpose. The government considers this a charitable gift that is tax deductible. Your easement’s value must be determined by a qualified appraiser; it equals the difference in the land’s value with all its development rights before the easement and its value after the land’s uses are restricted by an easement.

I. Federal Income Tax Deduction:
Congress in 2008 extended the most generous federal income tax deductions in history for landowners who donate a conservation easement. This law:

• Raises the deduction a donor can take for donating a conservation easement from 30 percent of his or her adjusted gross income in any year to 50 percent;
• Allows qualifying farmers to deduct up to 100 percent of their adjusted gross income. A qualifying farmer is one who earns 50% or more of his or her income from agriculture;
• Extends the carry-forward period for a donor to take tax deductions for a voluntary conservation agreement from 5 to 15 years.

Now, small farmers and those of modest means in the New River region can receive greater tax benefits for donating valuable conservation easement. (See Q&A below for details.)
You must donate your easement in 2008 or 2009 to qualify.

II. State Tax Credit
Virginia gives landowners a tax credit equal to 40 percent of their easement’s value—which can equal thousands and sometimes hundreds of thousands of dollars. The landowners can use the tax credit to eliminate all their state income taxes over 11 years (the year the easement is donated plus a 10-year carry forward). Or this tax credit can be sold for cash. Brokers will purchase these credits at 65-75 cents on the dollar. A landowner can also recruit buyers or work with the New River Land Trust to find buyers at 75 to 85 cents on the dollar.
In other changes, the state:

• Will only register $100 million a year in state tax credits. Any tax credits that can’t be registered in a given year will be carried over to the next year.
• Will charge a fee equal to 5 percent of the tax credit for sale and transfer of credits up to a limit of $10,000.00.
• Will review and verify all easements with a tax credit valued at $1 million or more.

III. Estate Taxes
Rising land values can push a farm’s market value to over the $3.5 million inheritance tax exemption. In 2011, that exemption will drop back to only $1 million—significantly less than the market value of many family farms. In addition, the IRS exempts 40 percent of the remaining value of land under easement from inheritance taxes up to $500,000. There are exceptions, so check with your tax advisor.

According to the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax is repealed in 2010, but then the act "sunsets" in 2011 and the estate tax reappears with an applicable exclusion amount of only $1,000,000 (unless Congress acts before then).” After 2011 we do not know what will happen and estate taxes may be a significant concern for landowners

“If you don’t do the planning, UNCLE SAM is going to tell your heirs what to do with that real estate and they aren’t going to like what they hear.—Stephen Small, tax attorney

IV. Property Taxes
Land under easement is taxed at its “land use” value in counties with land use assessment. In counties such as Grayson County, which do not have land use, the property must be assessed at its restricted value, thus lowering your county property taxes.

Q&A on Federal Income Tax Deduction

1. Can you give me an example of the difference the new changes make?
Under the previous rules, a landowner earning $50,000 a year who donated a $250,000 conservation easement could take a 30 percent deduction–$15,000–for the year of the donation and for an additional 5 years–a total of $90,000 in tax deductions. The new rules allow that landowner to deduct 50 percent of his or her income–$25,000–for the year of the donation and then for an additional 15 years–or up to the full value of the easement. In this case, the landowner could deduct $25,000 for 10 years. If the landowner qualifies as a farmer or rancher, he could deduct his full $50,000 income for five years.

2. Who qualifies as a farmer or rancher?
The law defines a farmer or rancher as someone who receives more than 50 percent of his or her income from “the trade or business of farming.” Activities that count as farming include:

• cultivating the soil or raising or harvesting any agricultural or horticultural commodity (including raising, 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 or operator regularly produces more than one-half of the commodity so treated; and
• planting, cultivating, caring for, or cutting of trees, or the preparation (other than milling) of trees for market.

The qualified farmer provision also applies to farmers who are organized as C corporations. The easement must require the land remain “available for agriculture.”

3. What is the timeline for this expanded incentive?
The law applies to all easements donated in 2008 and 2009.

4. Will donors who use this provision be audited?
Taking advantage of this law will not necessarily affect one’s likelihood of being audited. All donors should note, however, that the IRS has been increasing the number of tax returns it audits. That makes it particularly important for a donor to know and follow the law, and utilize a reputable professional appraiser who has experience in the appraisal of conservation easements.

To learn more, contact New River Land Trust: nrtl@newriverlandtrust.org or call (540) 951-1704

Click here for VA tax credit pdf and instructions
Click here for a list of lawyers, tax credit service providers and appraisers