Purchase of the Property or Conservation Easement at FMV
In some cases, where a property has significant resource value and the landowner is not interested in an easement, MCWD may purchase the entire property. Fair Market Value (FMV), according to the IRS, is “the price at which a property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of all the facts”. Or to put it in simpler terms, the price a landowner could sell a property in the existing market. MCWD policy requires that we have an appraisal done to determine the value, and that the District may not pay any more than the appraised, or fair market, value for the property.
In these cases the financial benefit to the landowner is the agreed upon purchase price. There are no income tax benefits for this type of exchange. However, in the case of a permanent conservation easement sale, there could be future estate tax benefits because the easement reduces the total value of the owner’s estate.
Purchase of the Property or Conservation Easement at a Bargain Sale Price
Another land conservation option is for the landowner to sell at a price lower than the FMV, and to take an income tax deduction for the value of the donation, which is the difference between the price paid and the market value price (as determined by a qualified appraisal). For example, a landowner could sell an easement that has a value of $100,000 to the District for $70,000. The landowner would receive the $70,000 for the sale and the amount of the charitable donation for income tax purposes would be $30,000 (the difference between 100,000 and 70,000).
In this case the financial benefit is the agreed upon purchase price, plus any additional income tax deductions, and in the case of a conservation easement, possible estate tax benefits.
Donation of Property or a Conservation Easement
A landowner can also donate the entire value of the property or easement to the District. Obviously in this case the landowner does not receive any payment for a purchase, but is able to deduct the value of the donation from their income taxes. Recent changes in the tax law have increased the amount that can be deducted for a conservation donation as well as increasing the amount of time over which those deductions can be taken (see below for more detail)
***Note- tax information provided by MCWD is for information purposes only. You should consult your own tax representative to determine the specific income and estate tax implications of any land conservation agreements with the District.***
Income Tax Reduction:
In 2006 congress passed legislation expanding the income tax deduction for qualified conservation contributions. That legislation was set to expire at the end of 2007, but a provision was added to the 2008 Farm Bill that renewed the tax incentives and extended them to the end of 2009. The tax incentives were again extended in 2010 by provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
The extended tax incentives at issue, which now apply to donations made in 2011 and retroactively to donations made in 2010:
- Raise the allowed deduction a donor can take for donating a voluntary conservation agreement from 30% to 50% of the donor’s income;
- Allow farmers and ranchers to deduct up to 100% of their income; and
- Increase the number of years over which a donor can stretch the total value of the deduction(s) from 6 years to 16 years.
For an example of how this works visit the Conservation Tax Center.
Estate Tax Reduction:
Putting a qualifying conservation easement on your land could save you hundreds of thousands, or even millions, of dollars in estate taxes. There are two ways in which a qualified conservation easement can work to reduce or eliminate estate taxes owed. First, an easement reduces the actual market value of the land subject to the easement, reducing the value of the estate. Second, Section 2031(c) of the Internal Revenue Code allows 40% of the value of property under conservation easement to be excluded from the taxable value of the estate.
Reduction in value. When a qualified conservation easement over a parcel of land is donated or otherwise conveyed, it restricts use of the parcel under easement, and reduces its market value. Reducing the total value of an estate reduces the amount subject to estate tax. It is even possible, in some circumstances, to reduce the value of an estate below the threshold at which taxes begin to be owed. How is this possible? The top 2011 estate tax rate is 35% on everything exceeding $5 millionl; the first five million dollars in an estate are excluded from tax. If a conservation easement reduces the value of an estate below $5 million exclusion amount, then no estate tax is owed. Consider the following three examples:
- Example 1: Upon her death, the decedent leaves her heirs an estate valued at $6 million, of which the single largest asset is DeerHaven, a forested piece of land which she cherished and wanted to see protected, and which is worth $5 million (the appraised value if sold for development). The first $5 million of the estate’s value is excluded from estate tax under current (2011) law, leaving $1 million taxable at 35%. Therefore, $350,000 tax is due. Her heirs respect the decedent’s wishes and want to keep DeerHaven intact, but the taxes on the estate are more than their circumstances allow them to pay in cash. They are not aware that they can make a post-mortem donation of a qualified conservation easement that would reduce or possibly eliminate the estate taxes owed. DeerHaven is sold to pay the estate taxes. It is broken up and developed into as many home lots as zoning permits.
- Example 2: Same as Example 1, except that before her death the landowner conveys a perpetual conservation easement over DeerHaven to the Minnehaha Creek Watershed District. The easement permanently protects conservation values on DeerHaven and limits future development in ways that reduce DeerHaven’s appraised value from $5 million (before easement) to $3 million (after easement). Upon her death, her estate is valued at $4 million (down from $6 million). The $5 million exclusion rule means the entire estate is no longer subject to estate tax; no tax is owed. The heirs hold onto DeerHaven and its conservation values are perpetually protected.
- Example 3: Same as Example 2, except that the owner never conveyed a conservation easement over DeerHaven. Her heirs, however, know that federal tax law allows them to convey a conservation easement after her death but before the estate tax return is filed, and still achieve the same estate tax benefits, so long as all heirs authorize the conveyance. As above, the heirs hold onto DeerHaven and its conservation values are perpetually protected.
Even when the value of an estate is such that estate taxes will be owed even after factoring in the reduced value of land asset(s) under conservation easement, the easements will reduce the value of land. For example, consider an estate whose sole asset is a parcel of land alternately worth $8 million without a conservation easement or $6 million with an easement: After subtracting the $5 million estate tax exclusion, the estate tax bill is either $1.05 million (without easement), or $350,000 (with easement).
The examples above only look at the estate tax benefit of the reduction in property value that comes from putting a property into a qualifying conservation easement. There is another tax benefit…
The 40 percent exclusion. The federal Internal Revenue Code contains a provision (IRC §2031(c)) that excludes 40 percent of the value of land in a qualified conservation easement from the taxed value of an estate. This is in addition to the “reduction in value” benefit. There are several caveats to §2031(c), however, that must be noted. First, the value of the 40 percent exclusion is not unlimited; it is capped at $500,000. For example, Under current (2011) law, large estates can realize up to $175,000 in estate tax benefits by putting a qualifying conservation easement on land in the estate. That amount jumps, to up to $275,000 after 2012. The benefits arise as a result of IRC §2031(c). Section 2031(c) provides that large estates (those exceeding the exclusion amount) can remove 40 percent of the remaining value of the estate, up to $500,000, from being taxed.
For estates large enough to be subject to estate tax, a conservation easement can reduce those estate taxes by up to $175,000 (up to $275,000 if after 2012) by reducing the overall value of land in an estate.
Although the estate tax incentives for land conservation that some the national Land Trust Alliance championed did not make it into 2010 legislation, this package does extend the 2001 law that removed the geographic limitations from the section 2031(c) estate tax exclusion for land protected by a conservation easement, through December 31, 2012. That means, even with a $5 million unified credit and 35 percent rate, landowners may still realize up to a $175,000 estate tax benefit for donating a conservation easement.
When property is subject to a conservation easement the total value of the property is reduced. Under Section 2031(c) of the Internal Revenue Code (IRC) a donor may save substantially on estate taxes if he or she donates a conservation easement. Under this section, up to $3,500,000 (as of 2009) may be excluded from one’s taxable estate if he or she had donated a qualifying easement. The Federal estate tax is scheduled to be repealed entirely effective January 1, 2010, but the repeal sunsets and the exemption amount reverts to $1,000,000 on January 1, 2011. In addition, if a landowner dies while still owning land subject to a conservation easement, the estate can take an additional 40% exclusion from the already reduced land value (up to $500,000).
For More Information Visit:
While the federal estate tax expired at the end of 2009, it will return at a $5 million unified credit and 35 percent rate in 2011.
Although the estate tax incentives for land conservation we championed did not make it in, this package does extend the 2001 law that removed the geographic limitations from the section 2031(c) estate tax exclusion for land protected by a conservation easement, through December 31, 2012. That means, even with a $5 million unified credit and 35% rate, landowners may still realize up to a $175,000 estate tax benefit for donating a conservation easement.
Estate Tax Fix Leaves out Conservation Incentives
Senate Democrats had included both of our estate tax incentives for land conservation in their year-end tax bill, but they fell out of the final compromise. We're hopeful these incentives will come back into play when the estate tax is reconsidered in 2012. That package does extend the 2001 law that removed the geographic limitations from the section 2031(c) estate tax exclusion for land protected by a conservation easement, through December 31, 2012. That means, even with a $5 million unified credit and 35% rate, landowners may still realize up to a $175,000 estate tax benefit for donating a conservation easement.
In 2013, the top rate is expected to rise and the exclusion amount to fall, so that the tax would be 55% on estate amounts over the first $1,000,000.
For more information visit the Land Conservation Program page.