If you own a parcel of land and would be comfortable permanently restricting its development, you may have an opportunity to save a lot on income taxes by setting up a conservation easement. Assuming all criteria are met, landowners may receive both a federal charitable contribution deduction and a state tax credit by creating a protected green space. You may even be able to sell your state tax credit to investors. Even if you’re not a landowner there may be opportunities to reduce your income tax liabilities by investing in a conservation easement.
What exactly is a conservation easement?
A conservation easement is a voluntary and legally binding agreement between a private landowner and the government or a qualified charitable conservation organization which permanently restricts anyone from making changes or alterations to the property that impacts the original conservation purpose.
Where did the idea come from to give tax benefits for conserving green space?
Conservation easements are not a new idea – you could even say it’s an “Old Faithful” strategy. In 1872, Yellowstone National Park was established when Congress secured two million acres of land that crossed three state borders. Yellowstone ushered in the movement to conserve land from development. In the 1930’s, the federal government used conservation easements to protect land along the Blue Ridge and Natchez Trace Parkways. The State of Georgia joined the movement in 1992 by passing laws governing conservation easements and related tax benefits.
What are the benefits of a conservation easement?
Taxpayers can take a federal charitable tax deduction up to 50% of their adjusted gross income. Georgia provides a state tax credit worth 25% of the fair market value of the donated property interest, up to a maximum credit of $250,000 for individuals and $500,000 for corporations, with a carry forward period of ten years. Check with your CPA to verify the current tax rules and to make sure this strategy makes sense for you.
What are the risks associated with this tax strategy?
The most important (and most subjective) part of creating or participating in a conservation easement is the underlying valuation. Because the IRS and tax courts scrutinize the valuation of conservation easements with a fine-tooth comb, a compelling valuation is vital. Whether you’re creating your own conservation easement or investing in a partnership, this is definitely one strategy of which it must be said, “Kids, don’t try this at home.” Work with your attorney or CPA to analyze the property appraisal before participating in a conservation easement strategy.
What are the downsides?
Once it’s done, it’s done. Careful readers will have noted the word “permanently” in the opening paragraph. When you create a conservation easement, you permanently restrict the use of the land. You cannot change your mind later. If and when you choose to sell the property, the easement follows the land, and that may reduce its marketability and sales price. For some, the trade-off – accepting a reduction in the property’s eventual, and taxable, sales price in exchange for a current year’s tax deduction and tax credit – is one worth making.
What if I don’t own any land I’m willing to designate as permanent green space?
You don’t need to own any land to benefit from this strategy. In fact, the most common way to benefit from the conservation easement strategy is to invest in a partnership which holds the land and creates the conservation easement for the benefit of its investors who receive a proportionate share of the federal tax deduction and state tax credit. These kinds of investment partnerships are heavily marketed. Although a sound strategy, we advise caution before investing. We recommend you have qualified counsel and/or your CPA review the documents, including the appraisal, before any money changes hands.