Tax Benefits of Donating Easements
Placing an easement on your property typically reduces its resale value, but that can be offset partially by tax benefits. Most landowners donate their conservation easement to a nonprofit land trust or government agency. The donation may qualify as a tax-deductible gift if the easement meets requirements of the federal tax code and provides significant public benefits. The potential tax advantages fall into three categories: income, estate and property (see chapters 6 and 7 for further tax discussions).
An appraisal that compares the market value of land with and without the easement reveals the value of an easement donation. Gifts of property worth more than $5,000, including easements, must be substantiated by a qualified appraisal to be eligible for a tax deduction.
Assume, for example, that owners of a coastal property worth $500,000 unrestricted place an easement on their land that precludes further development. A qualified appraiser might then determine that the land’s fair market value, without its development potential, is $200,000. The charitable gift of an easement then would be valued at $300,000. (Income & Estate Taxes describes limits on how much a taxpayer can deduct.)
Nearly all conservation easements reduce property values, but no rule of thumb governs what the diminution in value will be. Reductions range from less than 10 percent to more than 90 percent of a property’s fair market value. In general, the reduction tends to be greatest where a highly restrictive easement is placed on prime development land in an area experiencing rapid growth.
photo: Tom Arter
Sound conservation planning can reduce taxes, helping to keep land in family ownership over the generations.
High estate taxes can prevent a family from passing property on to the next generation. When individuals leave land to their family, heirs may find that the property has appreciated so much since its purchase that the estate or family must sell the land to cover estate tax payments.
The federal estate tax—levied at rates between 45 and 50 percent—is based on land’s fair market value. If your land has significant development potential that you never intend to use, removing that value from the land before it passes to family could help minimize the tax burden for your heirs. Reducing estate taxes by restricting future development can be particularly beneficial for landowners with sizeable estates and substantial real estate holdings because federal law currently exempts the first $1 million worth of assets per individual (and this figure is slated to rise gradually to $3.5 million by 2009).
Placing an easement on your land may result in property tax savings. The property tax assessment must be based on the land’s fair market value and an easement will almost always reduce this value. Taxes should reflect the land’s reduced market value under easement. You should inform the town when you place an easement, and you may wish to provide evidence of reduced value. Alternately, you can apply for tax classification in the State’s farm, open space or tree growth tax programs which are designed to provide a reduced standardized property tax for undeveloped lands (see Property Taxes).
photo: Rich Knox
By donating an easement, the previous owners of Bradley Pond Farm ensured that their land always will remain available for farming and timber management.
Donating a Conservation Easement
Forty-five years ago, Frederick and Florence Call went in search of the perfect place to farm. After driving roughly 30,000 miles, they settled on Bradley Pond Farm in Topsham, a 163-acre expanse of meadows and forests along the Cathance River, which flows into Merrymeeting Bay.
Over time, the Calls became concerned that high property taxes would force the sale of their treasured farm. After reviewing their options with Maine Coast Heritage Trust and the local Brunswick Topsham Land Trust (BTLT), they decided that donating an easement would allow them to conserve the land while continuing to farm it. "You have to make a choice in life," says Florence Call, "either for the big bucks or for something you believe in."
The Calls donated a conservation easement to BTLT that permits additional buildings only within a 5-acre farmstead. The remaining land will stay undeveloped, available for farming and timber management. While easements do not necessarily guarantee public access, the Calls wanted the public to enjoy their land--a tradition begun years ago when hundreds of area Girl Scouts camped at the farm. BTLT created a trail system for hiking and skiing that it manages as the long-term easement holder.
The Calls recently sold their property to new owners who share their commitment to sustain its beauty and ecological health. Having an easement in place helps to reassure the Calls that the land they have cared for much of their lives will remain protected in perpetuity. "You may own the land," Florence Call says, "but you don't really. You're stewards of it. I really believe you ought to leave it in better shape than you found it."