Tax Benefits
Conservation easements protect significant open lands in perpetuity. Both the federal government and state of Colorado recognize the necessity of voluntary land conservation and have created important tax incentives that can help make private land conservation alluring and affordable. In order to qualify for tax benefits, an easement must be perpetual, its value must be established by a qualified appraisal, and it must be granted for conservation purposes to a qualified conservation organization. Tax benefits include:
1. Federal Tax Benefits:
The following federal tax incentives may apply to a landowner who donates a conservation easement that meets Internal Revenue Code requirements…
a. Federal Income Tax Deduction:
A charitable income tax deduction is available for income tax purposes. The amount of the deduction will be determined by the value of the conservation easement (which is the value of the property before granting the conservation easement minus the value of the property subsequent to granting the easement).
Historically, the income tax deduction was limited to 30% of adjusted gross income (AGI), and it could only be used in the year of the donation and each of the five following years (for a total of six years). Congress recently passed, through 2009, a federal tax incentive for conservation easement donations that raises the deduction a donor can take for donating a conservation easement from 30% of his/her AGI in any year to 50% (qualifying farmers and ranchers are allowed to deduct up to 100% of their AGI). The incentive also extends the period in which the deduction can be used from 6 years to 16 years. So, if a farmer donates an easement worth $500,000 and pays $20,000 in federal income taxes a year, that farmer can take a total of $320,000 in deductions over the 16-year period. The deduction may be used against both ordinary income and capital gains.
b. Federal Estate Tax Reduction and Exclusion:
Estate Tax Reduction ~ Because the grant of a conservation easement reduces the value of the property, that value is also removed from the taxable estate. Thus, the property value reduction can lower estate taxes significantly.
Estate Tax Exclusion ~ Moreover, pursuant to Internal Revenue Code Section 2031(c), if the value of the easement equals at least 30% of the original land value, there is an estate tax exclusion of up to 40% of the value of the land subject to a qualified conservation easement, up to $500,000. For example, remember how in the hypothetical example that the Smiths’ property value was reduced by 50% (down to $2.5 million from $5 million). As a result, the Smiths were able to capitalize on the full exclusion of $500,000, because 40% of $2.5 million is $1 million. The exclusion can be taken in addition to the estate tax reduction described in the first paragraph. The exclusion can also be taken by each succeeding generation of heirs of the original easement donor so long as the land remains in the family.
Other estate tax principles to be aware of ~ Federal tax law set the minimum value of an individual estate to be taxed at $2 million in 2008 and $3.5 million in 2009. There will be a complete repeal of the estate tax in 2010. However, without further congressional action, the estate tax will be fully reinstated in 2011 (which means that only $1 million of an estate will be exempted from estate taxation).
2. State Tax Benefits:
Like the federal government, the Colorado government provides substantial tax incentives for pursuing a conservation easement on a property…
a. State Income Tax Credit:
Colorado is one of just a handful of states that provide tax credits for landowners granting conservation easements. Pursuant to House Bill 06-1354, a conservation easement donor can claim up to 50% of the fair market value of the conservation easement as a tax credit. Under the law, the maximum income tax credit that can be claimed is $375,000 (based on a $750,000 donation).
The tax credit is allowed for qualified conservation easements that meet federal requirements. Here are some other facts about the Colorado income tax credit:
- Credit not used in the year of the easement donation may be carried forward for up to 20 succeeding income tax years;
- A taxpayer may claim only one conservation easement tax credit per year;
- A taxpayer who carries forward an unused portion of a tax credit may not claim additional credits until the original credits are used;
- A taxpayer may transfer (give or sell) all or part of his/her credit to one or more other taxpayers (transferees) to be used against the transferees’ Colorado income tax;
- A taxpayer may claim a refund of any unused portion of the tax credit from the state in years where there is a revenue surplus; and
- The credit is available only to “resident individuals” or “domestic or foreign corporations.”
b. State Property Tax Benefit:
According to Colorado Law, House Bill 95-1268, C.R.S. 39-1-102(1.6)(a)(III), if a property is 80 acres or larger and classified as “agricultural land” at the time of the gift of a conservation easement, the property will forever be taxed at the agricultural rate. This allows farmers and ranchers who have protected their land with conservation easements to take their land out of production without losing their favorable agricultural tax classification.
Disclaimer: The examples on this website are merely hypothetical situations. The values, costs, and tax benefits relating to a particular easement will vary for each landowner and each property. There is no substitute for obtaining competent legal and accounting advice from consultants experienced with conservation easements, accounting, and tax law.