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Tax Advantages
Florida Conservation Easements
Introduction
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Tax incentives help many landowners
take advantage of conservation
opportunities. The potential tax benefits of a donated conservation
easement are twofold. First, income tax benefits may accrue
at the federal level and, depending on the landowner’s residence,
the state level as well. Second, the conservation easement
works as an estate planning tool to reduce estate tax liability,
there by allowing family ranches and farms to be passed
from generation to generation with the potential of a substantially
lower tax burden. Conservation easements by law do not affect
Florida property tax levels. Though there are some limitations to the use of the land that is
designated as a conservation easement, this is determined at the time that the conservation easement is created. Use of
the land for agricultural purposes can often be perpetuated. As explained above, the primary purposes of conservation
easements are: 1) to preserve our natural open space lands by prohibiting development; 2) allow family farms and
ranches to pass to succeeding generations by reducing capital gains and inheritance taxes and; 3) provide income tax
deductions for individuals who are interested in putting private lands into conservation easements, often for public
use.
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Qualifying for a Tax Deduction
To qualify for a tax deduction, your donation must be considered
a charitable gift by the Internal Revenue Service. To determine
whether your gift meets IRS requirements, it is best to
review the proposed gift with an experienced attorney or
accountant. A deductible, charitable donation can only be made
to an IRS-qualified, tax-exempt organization. It must
be considered a true gift motivated by a charitable intent
and not granted as a requirement for getting something in
return. For example, a conservation easement donated by
a developer, in exchange for government approval of a subdivision,
is not considered a gift. A gift must also be complete and
irrevocable, without strings or contingencies.
Quantifying the Tax Deduction
For tax deductions on gifts worth more than $5,000 (other
than cash and publicly traded securities), landowners must
obtain a "qualified appraisal" by a "qualified appraiser."
(These terms are defined by the IRS; check with your attorney
or accountant for details.) You should consult with a professional
appraiser who has direct experience with charitable gifts
or easements. Either we or the land trust can refer you to
appraisers with experience in this field, but cannot provide
the appraisal. The appraisal cost is a necessary expense
if you wish to pursue a charitable tax deduction.
INCOME TAX
Contribution Value
For illustrative purposes, let’s assume you are the owner
of a riverside ranch and you would like to donate a conservation
easement on the property. Working with the land trust staff, you negotiate
the terms of the easement, which continues agricultural
use, protects wetlands and important wildlife habitat, allows
for potential construction of an additional residence, precludes
commercial development, subdivision and surface mining,
and prevents any commercial waste dumping.
To quantify the value of the charitable contribution generated
by the donation of the easement, you must obtain a "qualified
appraisal" by a "qualified appraiser." As recipient of the
donated conservation easement, the land trust needs to be detached
from the appraisal process. In this example, the appraisal
sets the fair market value of the ranch at $1 million. This
is the value of the property before the conservation easement.
The appraisal also consists of data on sales of comparable
properties already under conservation easement, data on
the sale of developed and undeveloped comparable properties,
information on appraised values of other conservation easements
and the specific terms of this conservation easement. All
of this information is used to arrive at the market value
of the property after the conservation easement is in place.
The difference between the before and after values becomes
the amount of charitable contribution.
For this example, let’s assume that the appraisal determined
that the after value is $600,000. Thus, the before value
of $1 million minus the after value of $600,000 generates
a charitable contribution of $400,000. In other words, the
value of the conservation easement as a charitable contribution
is 40 percent of the before market value.
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| Before conservation easement property value = $1,000,000 |
| After conservation easement property value = $600,000 |
| Value of charitable contribution = $400,000 |
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NOTE: The before value of a conservation easement
donated within the first 12 months of purchasing a property
must be your basis, or what you paid for the property. |
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The 30% limitation
Federal tax law generally allows a maximum deduction of
30 percent of your Adjusted Gross Income (AGI) in any given
year through the donation of a conservation easement on
a property owned for more than one year. However, you can
use the 30 percent deduction for up to six years until the
value of the charitable contribution is used up. In our
example, the value of the charitable contribution generated
through the donation of the conservation easement is $400,000.
Let’s assume that the landowner’s annual AGI is $330,000,
which remains constant. The deduction resulting from the
easement is as follows: (30 percent of $330,000 = $99,000).
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Easement Deduction
| Year 1 |
$99,000 |
Year 4 |
$99,000 |
| Year 2 |
$99,000 |
Year 5 |
$4,000 |
| Year 3 |
$99,000 |
Year 6 |
$-0- |
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Total |
$400,000 |
| The actual tax reduction is a function of your income tax
bracket. In this case, in Year 1 the landowner would apply
his or her tax rate to a $231,000 AGI instead of $330,000
AGI. (If the landowner’s tax bracket is 33 percent, the actual
tax savings in Year 1 would be $32,670.) |
The 50% election
As an alternative, the landowner may elect to use the property’s
basis (usually the original purchase price or its inherited
value) instead of the appraised fair market value as the
"before" conservation easement value. If this election is
chosen, an annual deduction of up to 50 percent of adjusted
gross income is allowed for a period of six years or until
the charitable contribution is used up, whichever occurs
first.
Where property has appreciated in value, the 30 percent
option may be more advantageous. The 50 percent election
is most appropriate for taxpayers whose property has appreciated
little, who anticipate a large drop in income, who recently
purchased or inherited land or who do not expect to live
to take advantage of the full five-year carry-forward period.
Corporate Income Tax
The income tax benefits of a conservation easement to a
corporation are identical to those of the individual taxpayer,
except a corporation can deduct only up to 10 percent of
the net income before the contribution deduction, per year,
over six years through the donation of a conservation easement.
Deductibility of Easement Costs
Some of the costs incurred in making a charitable contribution
are themselves deductible. Legal and appraisal fees and
costs associated with compilation of the "Resource Documentation
Report" can generally be deducted as business expenses if,
in combination with other miscellaneous deductions, they
exceed 2 percent of your adjusted gross income. Any cash
or securities given to endow stewardship of a conserved
property are considered charitable contributions.
Estate Tax — Succession Planning
State and federal estate taxes are based on the fair market
value of the property at the time of the landowner’s
death, not the original purchase price or current use value.
This can be a significant and potentially debilitating tax
burden for farm and ranch families whose land values have
appreciated over time, particularly if the appreciated value
is due largely to increased development value. Sometimes
caught unaware and without the benefit of estate planning,
ranch families may have to subdivide and sell some of their
land just to meet the estate tax obligations. Conservation
easements can be a useful estate planning tool to reduce
estate tax liability and allow ranches to remain in the
family.
Reflecting changes that take effect in 2002, generally
the first $1,000,000 in assets (including land) that an
individual gives during his or her lifetime, or holds at
the time of their death, is not subject to gift or estate
taxes. Married couples may pass on $2,000,000 of property
tax-free to their heirs either by gift or through their
estate. The estate tax exclusion increases to $2,000,000
in 2006 and to $3,500,000 in 2009. The gift tax exclusion
remains at $1,000,000. If the ranch qualifies as a familyowned
business, as provided/defined in the tax law, each individual
owner may be eligible for an exclusion of $600,000 in addition
to the applicable exclusion amount ($1,000,000). The familyowned
business exclusion is eliminated after 2003. The federal
estate and/or gift tax levied on amounts that exceed these
exemptions is between 37 and 50 percent (due within nine
months of the death). Conservation easements reduce the
fair market value of the property by restricting the amount
and kind of development that may occur. This reduction in
fair market value also reduces the value of the estate.
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Changes In Individual Estate
And Gift Tax Exclusions
| Year of Death |
Estate Tax
Exclusion* |
Gift Tax
Exclusion* |
| 2001 |
$675,000 |
$675,000 |
| 2002 |
$1,000,000 |
$1,000,000 |
| 2003 |
$1,000,000 |
$1,000,000 |
| 2004 |
$1,500,000 |
$1,000,000 |
| 2005 |
$1,500,000 |
$1,000,000 |
| 2006 |
$2,000,000 |
$1,000,000 |
| 2007 |
$2,000,000 |
$1,000,000 |
| 2008 |
$2,000,000 |
$1,000,000 |
| 2009 |
$3,500,000 |
$1,000,000 |
| *Exclusion amount is per individual |
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For example: The Adams family has owned a ranch
for three generations. The parents
are in their mid-60s and want to pass the ranch on to their
children. One child has moved away and is living on the
East Coast. Another has stayed on the ranch and worked it
with the parents over the years. Both children want to see
the property remain whole and a working ranch, as do the
parents. They are concerned that the value of the ranch
has appreciated significantly over time and they will not
be able to keep the ranch because of a potentially large
estate tax liability.
Let’s assume that the ranch has appreciated to a current
fair market value of $4,000,000 as determined by appraisal.
The owners donate a conservation easement to the land trust which generally
limits development of the property but enables the continuation
of agriculture. A “qualified” appraiser determines
the value of the conservation easement to be 36 percent
of $4,000,000, or $1,440,000.
Each parent has an applicable exclusion amount of $1,000,000*,
for a total of $2,000,000. This allows the parents to pass
on $2,000,000 of property to heirs either by gift or through
their estate free of tax. Without a conservation easement
in place, this would leave $2,000,000 ($4,000,000 minus
$2,000,000) resulting in a $780,000 estate tax liability.
With the conservation easement in place, the value of the
ranch for estate tax purposes would be $2,560,000 ($4,000,000
minus the $1,440,000 value of the conservation easement).
Utilizing Mr. and Mrs. Jones’ individual $1,000,000
estate tax exclusions, the estate taxable value of the ranch
would be reduced to $560,000 ($2,560,000 minus $2,000,000)
resulting in $178,000 in estate tax. By placing a conservation
easement on the property, the family has not only kept the
ranch whole, protected fish and wildlife habitat and open
space, but also saved $602,000 in estate taxes in 2002.
Additional Estate Tax Exclusion
Beginning January 1, 1998, the tax law allows beneficiaries
to exclude from the taxable estate up to 40 percent of the
value of the land subject to qualifying conservation easements
(this is in addition to the reduction in value of the land
as demonstrated in the example on the previous page). The
exclusion is $400,000 in 2001, and $500,000 in 2002 and
thereafter. Assuming a 50 percent estate tax rate, this
exclusion saves an additional $250,000 in estate taxes.
Applying this provision to the Jones family example, the
estate tax liability could be reduced to zero.
Estate
Tax Liability (2002)
$4,000,000 Value Of Property |
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Without Conservation Easement
Estate Tax Due $780,000
With Conservation Easement
Estate Tax Due $178,000
With Additional Estate Tax Exclusion
Estate Tax Due $0
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Post-mortem Election
The new federal tax law allows estate beneficiaries and/or
the executor to elect to place the land under conservation
easement after death, but before filing an estate tax return.
Estate Planning
Conservation easements are only one component of several
estateplanning options available to effectively pass on
a ranch or farm, as well as other assets, to the next generation.
Proper planning with a qualified estate planning team is
essential to maximize the benefits of available estate tax
exclusions.
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The comments in this brochure reflect our understanding
of federal tax law as of November 2001. The examples used
in this brochure are for illustrative purposes only. The South Florida Real Estate Network
does not purport to give legal or tax advice about the consequences
of a particular conservation easement. The tax implications
of your conservation plan will depend upon the value of
your gift, your finances and other factors particular to
your situation. To fully understand how current law affects
your conservation plan, you need to consult with your attorney,
CPA or tax adviser.
If you would like more specific information or wish
to discuss a conservation easement donation, please contact
us.
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