When I used to be a construction project engineer one of my projects was to fill in some wetlands to build new transportation infrastructure. Now environmentalists and other interested parties (conservation groups and Indian tribes) will try to use their political power to block these projects in the permitting stages. Being in the design and permitting stage of a project for 3-4 years and basically getting extorted by other parties to get your project completed was just another reason why I was so motivated to build passive income and quit my job. In this instance, I could have mitigated the environmental impacts of my project by purchasing (extortion like I said) land conservation easements from a conservation easement developer. This developer titles property to never be developed and builds the land to be good for fish and trees – think of making stream channels for fish breeding and wetland plantings. It gets a little more technical as this developer hires a bunch of environmental consultants who then consult with the government agencies on the environmental value this development creates.
But for the investors like us… we don’t really care about the above.
Land Conservation Easements investing is a charitable donation that allows you to deduct the value of the land off your taxes.
The loophole here is that often what you purchase a piece of get multiplied by a factor of 4x to 5x to get your tax deduction. Crazy huh!?! So if you invest $100,000 you could likely see a $500,000 tax income deduction.
Note – with the 2018 tax changes with bonus depreciation via a cost segregation it has made land conservation easements as a tax mitigator a bit obsolete for most people.
Don’t believe me here are some sample tax forms. If your CPA looks cross eyed about this stuff let me know if you need a referral. Or sign up here for a free strategy session for my folks.
How Do Conservation Easements Get You Tax Deductions
Contributed by John Blakely
Selling any land or property you own has always been a positive financial decision, but many people are quickly discovering that there’s another option; donating a conservation easement in order to get tax deductions. However, many people still don’t understand how conversation easements can get them tax deductions.
Conservation easements essentially mean giving up a portion of the value of your property in order to preserve it for their children and grandchildren. However, that doesn’t mean that property owners are losing out financially, as there are a number of tax incentives for doing so.
It should also be noted that conservation easements are legally considered a form of charitable donation and are regulated as such. Because of that, you should probably be aware of some of the rules surrounding charitable donations although there are several laws and benefits that are specific to easements.
What Are Conservation Easements?
Essentially, these boil down to a legally binding agreement between a property owner and a government agency or land trust. In exchange for the ability to protect their land, land owners give up certain property rights, namely the ability to make major changes to the land.
While the land owner retains certain rights, they give up the likes of building any more large structures on the parcel of land. The easement may also apply to either the full piece of land or even just a small portion of it. Having said that, the majority of rights still belong to the initial homeowner and they will be able to sell the land or pass it on to their heirs.
However, this does come with the fact that all future owners will be legally bound by the terms of the initial conservation easement. It should also be noted that conservation easements don’t need public access in order to qualify, which may make it a whole lot easier for property owners with large swaths of land to donate.
What Benefits Do Conservation Easements Have?
While there may not be immediate benefits with this kind of agreement, there are several tax incentives that make it worthwhile. This is because they qualify as a charitable tax donation and can be used to reduce a landowners federal income tax for the long term.
There are three major tax areas where it can be beneficial to landowners to enter into a conservation agreement. Firstly is that it raises the deduction you can make from your federal income tax to 50% of your income. A law passed in 2015 also means that you can carry forward this tax deduction for up to 15 years after the signing of the original conservation agreement.
This means that landowners will be able to increase their federal income tax deduction by 50% for up to 15 years. Lastly, qualifying farmers will be able to increase their federal income tax deduction by up to 100% of their income for a 15 year period. A permanent incentive also applies to any easement that has been made after December 31, 2014.
This is a major change to previous laws. Prior to the 2015 change, conservation easements only increased your tax deduction up to a 30% limit. Furthermore, the carry over period only lasted for up to five years. On top of that, qualified farmers were only able to get a tax deduction of up to 50%.
With that in mind, the newer law offers a whole lot more benefits than it was previously; in some cases the tax deductions have effectively doubled and last for three times longer than the previous law. Because of that, they offer a lot of financial freedom for may property owners.
With that in mind, conservation easements are quickly becoming an appropriate alternative to selling your property. In fact, it can end up saving almost as much money as a property owner may have gotten from selling off the property in the first place.
What Is A Qualified Farmer?
Not all farmers will be able to qualify for this deduction, as there are a number of criteria that can either qualify or disqualify them. Chief among these is that a qualified farmer must make at least half of his or her income from farming itself; i.e, they must make at least 50% from farming related activities.
There are a number of activities that have been legally defined as farming related activities. The most obvious of these is that said farmer must make money from growing crops. The second activity is the handling or packaging of said goods, although the farmer must have grown at least 50% of these crops themselves.
The preparation and cultivating of trees for the market also falls under this remit, although milling isn’t covered by this. With that in mind, many farm owners or ranchers will need to be sure that they fit under these restrictions before considering a conservation easement.
On top of these restrictions, the conservation agreement must also include a statement that the land will still be available for agriculture as long as the agreement is in place. Because of that, the purpose of the land won’t be able to change to anything else, such as housing.
What Types Of Easements Qualify For Deductions?
While there are many types of conservation easements, there are only four types that qualify for a federal tax deduction and each of these are related to protecting some aspect of the land. The first of these is a conservation that protects fish, wildlife or plants.
Secondly, there’s an easement that opens up land for recreational or educational use. Thirdly is one that protects any undeveloped land or any unused space that could be used publicly. Lastly is a conservation agreement that preserves any historic landmarks, which is what many people would be most familiar with.
What needs to be remembered is that these are charitable donation and follows may of the same rules as other charitable donations.
What Rules Are In Place For Donating Property Rights?
While farms have a lot of rules in regards to easements, there are also a number of rules for any type of conservation easement to qualify for a federal tax deduction. Chief among these is that the property must be donated to what the government calls a qualified conservation organization.
These include government agencies, charities and other tax exempt groups. However, the organization must be able to enforce any rules and requirements related to easements. They should also commit to enforcing each of these rules.
These agreements must also be written in to any public records related to the property, such as land deeds. Lastly, the person donating the property must also agree to protect the property “in perpetuity.” Because of that, any future owners or heirs will also have to abide by the agreement.
There are also a number of statutory requirements to follow, as easements are considered a charitable donation and must follow the same rules and regulations. Having said that, the exact rules and regulations may differ slightly from state to state.
How To Determine The Value Of An Easement
Once of the biggest problems with these kinds of agreements is figuring out the value of value of the easement. Having said that, this can also be a major factor in how much of a federal tax deduction you might be able to receive.
Federal law means that you must get an appraisal in order to determine the fair value of the easement. However, that may be difficult to pin down depending on who is appraising the property and may differ from what you believe the property is worth.
Having said that, an appraisal is mandatory and the value of your easement will be greatly affected by how well the property is appraised. However, that doesn’t mean that owners should overstate the value of the property being donated. Should that happen, property owners may be subject to fines and criminal charges.
However, easements are normally appraised near the highest value owners may receive should the property actually be sold. That being said, there have also been a number of cases of people trying to abuse the system. Having said that, the likes of the IRS has been steadily cracking down on anyone found to be abusing the conservation easement system.
How To Get Your Federal Tax Deduction
Receiving your federal tax reduction is a relatively simple process. Since easements are considered identical to non-money charitable donations, they’re regulated the same as them and thus need to be filed for in the same way.
When filing for your tax returns, property owners should also submit a Form 8283 which will detail the easement in depth. Once that’s been done, it’s as simple as waiting for your tax returns as you normally would.
In general, receiving your tax deduction will take the same amount of time as any other tax deduction. You should also re-file the Form 8283 with every tax return in order to ensure that you’re getting this tax deduction for every year that it’s applicable.
About the Author:
John Blakely has had a passion for all things personal finance for over a decade. He is a firm believer in having big financial dreams and executing on a plan to realize them. He is an Education Ambassador for ScoreSense where you can find more of his writings.