Donating and Tax Benefits
What is a conservation easement?
Thank you for your interest in conserving your land with the Northern Virginia Conservation Trust. The gift of a conservation easement or of title to land may qualify as a non-cash charitable gift, providing you with various tax benefits. While our staff cannot provide tax advice and recommend you seek it independently, we hope the information below will help you and your advisors in your financial planning. Please contact us for more information.
How is a conservation easement valued?
A donor applying for tax benefits must hire an independent certified appraiser to establish the value of the easement using what is called a ‘qualified’ appraisal as defined by tax regulations. Typically, the appraiser will determine the fair market value of the property both before and after it is restricted by the conservation easement. The difference is the easement’s value, which is the basis for calculating tax benefits, and normally represents the value of any legally permissible development potential extinguished by the easement.
How is land valued?
Gifts of land are valued at fair market value by an independent certified appraiser retained by the landowner.
Tax Benefits Available to Consumers
Federal Income Tax Deduction
Donations of conservation easements or land that meet federal tax code requirements may entitle the donor to a federal income tax deduction. The deduction is limited to 50% of adjusted gross income, which if not used up in the year of the gift may be carried forward for an additional fifteen years or until fully expended, whichever comes first. The value of the deductions taken must be reduced by the amount of any state tax credits received (see below). An IRS Form 8283 must be filed to obtain this deduction, which requires a detailed set of submissions and NVCT’s review, and competent tax counsel familiar with conservation easement transactions should be consulted.
Virginia State Tax Credit
Virginia’s Land Preservation Tax Credit is an income tax credit available for donated conservation easements or land that provides landowners with a dollar-for-dollar benefit for their gifts. It is available for 40% of the value of the donation. Individual taxpayers generally may use tax credits up to $20,000 per year, for a total of up to eleven years.
Unused credits may also be sold to another Virginia taxpayer, allowing landowners with little or no Virginia income tax burden to take advantage of this benefit. After paying related transaction costs and fees, landowners typically net about 80 cents on the dollar when selling credits; timing considerations and annual limits mean consulting with an experienced attorney or tax credit broker is recommended when assessing your own strategy.
Tax credits of $1 million or more require that the conservation value of the donation be verified by the Virginia Department of Conservation and Recreation (pre-filing review of the conservation value is available). Please let NVCT know if you will be applying for the tax credit.
Federal Estate Tax Reduction and Exclusion
Extinguishing some or all of the development rights for a parcel of land through a conservation easement may reduce the value of the land for estate tax purposes, thus reducing any estate taxes owed. In addition, Section 2031(c) of the Internal Revenue Code provides an estate tax exclusion from the gross estate of up to 40% of the remaining encumbered value of the land (but not improvements on the land) protected by a qualified conservation easement. The exclusion is capped at $500,000 and is reduced if the conservation easement reduced the land’s value by less than 30% at the time of the contribution. To qualify, the easement must prohibit all commercial recreational use other than de minimis use.
Local Property Taxes
Local property taxes may be reduced with respect to land in a conservation easement (but not dwellings, farm buildings, or other improvements to the land). However, if land is already enrolled in a local land-use assessment taxation program, a conservation easement is unlikely to result in an additional reduction in taxes. Landowners should ask their local jurisdiction whether a reduction is possible.