Robert H. Levin -Attorney at Law         

 Tax Benefits of Donating Conservation Land

             There are several kinds of tax benefits available to donors of land or conservation easements.  This article attempts to summarize these benefits and provide some examples of how they work.  If you are uncertain about the differences between bargain sales and donations, or conservation easements and whole interests in property, go to Conservation 101 for a quick brush up.

Federal Tax Benefits

             There are two main kinds of federal tax benefits available to conservation donors:  federal income tax benefits and federal estate tax benefits. 

             Federal Income Tax Benefits – Donors of land and conservation easements may claim an income tax deduction under § 170 of the Internal Revenue Code.  The exact amount of tax savings depends on several factors:

o     How long the donor has owned the property (benefits are generally greater if owned for more than one year);

o     How the donor has used the property (residence, investment, agricultural);

o     The income of the donor (the higher one’s income, the more one will save on taxes); and

o     The value of the donated property (the more valuable the property, the bigger the deduction).

          Federal Estate Tax Benefits – A donor may also save substantially on estate taxes if he donates a conservation easement.  Under § 2031(c) of the Code, up to $500,000 may be excluded from one’s taxable estate if he or she had donated a qualifying easement.  As with the income tax benefits, the larger the value of the donated easement, the bigger the deduction.

          The federal estate tax is currently in great flux.  In 2003, any estate of $1 million or more is subject to the estate tax.  This number rises gradually and the estate tax is completely phased out in 2010.  But in 2011, the estate tax is back, along with the $1 million threshold.  It is likely that Congress will revisit the estate tax in the coming years, so it is impossible to make any long-term predictions. 

 State Tax Benefits

             Some states have enacted income tax deductions or credits for the donation of land or conservation easements.  Check with your local land trust for more information.  There is no such state income tax benefit in Maine. 

 Local Tax Benefits

             Local Property Tax Benefits – In general, property tax reductions are available for landowners who grant land or a conservation easement.  The exact results depend on state law.  In Maine, property subject to a conservation easement will qualify under the Open Space Tax Program.  The landowner must file an application with the local tax assessor, who will then make the final decision on the amount of the reduction.

 Examples

 The following numbers are purely hypothetical and are not to be relied on by anyone as a representation or guarantee of tax results.  These numbers have been simplified and approximated and do not represent predictions for any individual.  They are also do not constitute legal advice.  Donors are encouraged to obtain independent legal advice before proceeding with a donation.

 Example One -- Donation of Property

             Frank and Eleanor own 137 acres of Maine forestland.  The land is appraised at $1,314/acre for a total of $180,000.  The land is also assessed for property taxes at $180,000, and the town’s property tax rate is 1.5%.  Frank and Eleanor have steady annual taxable income of $100,000.  In 2003, Frank and Eleanor decide to donate their property to a Maine land trust. 

Amount of Charitable Contribution:                   $180,000

Estimated Income Tax Savings:                          $46,200 (over 6 years)

Estimated Estate Tax Savings:                           $0 - $88,200

Estimated Property Tax Savings:                       $2,700 per year

Explanation:    Frank and Eleanor have made a charitable contribution of $180,000.  However, they may not claim this entire amount on their 2003 federal income tax return.  The deduction is allowed to the extent of 30% of their Adjusted Gross Income (AGI, line 36 of their Form 1040), $30,000, in 2003, and an additional 30% of their AGI over each of the next 5 years.  Assuming that Frank and Eleanor’s income remains at $100,000, then they will be able to claim deductions of $30,000 each in years 2004 through 2008.  A deduction of $30,000 in 2003, assuming a marginal rate of 27%, results in a tax savings of $8,100.  Because of lower income tax rates that take effect in 2004 and 2006, this amount will likely drop to a savings of $7,800 in 2004 and 2005 and $7,500 in 2006 - 2008.  Adding these savings up, Frank and Eleanor will save a total of $46,200 over 6 years on their federal income taxes.

             Frank and Eleanor’s estate tax savings can vary greatly, according to when they die and the value of their estate.  The estate tax is currently in a period of great flux, so it is impossible to provide the full range of possibilities.  However, if they are very wealthy, Frank and Eleanor could save as much as $88,200 on estate taxes.  Because they no longer own the property, it will not be taxed as part of their estate.

             Because Frank and Eleanor no longer own the property, they will not have to pay any property taxes.  Based on a tax rate of 1.5%, which is about average for Maine, they will save $2,700 per year. 

 Example Two -- Donation of Property, Higher Income

             Let’s take the same set of facts as in Example One, except now Frank and Eleanor have annual taxable income of $600,000. 

Amount of Charitable Contribution:              $180,000

Estimated Income Tax Savings:                     $69,480 over one year

Estimated Estate Tax Savings:                       $0 - $88,200

Estimated Property Tax Savings:                   $2,700 per year

Explanation:    The overall deduction remains at $180,000, but now Frank and Eleanor may claim the entire amount in the first year.  Also, because of their higher marginal tax rate, they wind up saving even more in taxes.  Thus, they may be able to save 38.6% of $1800,000, or $69,480 in 2003.  (Note:  This amount may be reduced by up to $3,000 under the high-income phaseout under § 68 of the Internal Revenue Code.)

Example Three – Bargain Sale of Property

            Let’s say that instead of donating their property, Frank and Eleanor decide to sell it at a reduced value.  Assume that they purchased the property in 1990 for $40,000 and that it is now valued at $180,000.  Frank and Eleanor sell it for $90,000.  Their annual taxable income is $100,000. 

Amount of Charitable Contribution:                          $90,000

Estimated Income Tax Savings:                                $6,080 over 3 years

Estimated Estate Tax Savings:                                  $0 - $88,200

Estimated Property Tax Savings:                              $2,700 per year

Explanation:   Frank and Eleanor may claim a charitable contribution deduction of $89,000 on their 2003 federal income tax return.  This deduction is allowed to the extent of 30% of their AGI, or $30,000 in 2003, and an additional 30% of AGI over each of the next 5 years. Assuming that Frank and Eleanor continue to earn $100,000 each year, then they will be able to claim the last of the $89,000 deduction in 2005.  A deduction of $30,000 in 2003, assuming an average marginal rate of 27%, results in a tax savings of $8,100.  Because of lower income tax rates that take effect in 2004, this amount will likely lead to a savings of $7,800 in 2004 and 2005.  Adding these savings up, Frank and Eleanor will save an estimated total of $23,700 over 3 years. 

          At the same time, they will have to pay state and federal capital gains tax on the sale portion of the transaction.  Assuming that $70,000 of the $90,000 consideration will be a taxable gain, then the capital gains tax would be $18,550 ($70,000 X assumed combined state and federal rate of 26.5%). 

Example Four – Donation of Conservation Easement

            As with the previous examples, assume that Frank and Eleanor have owned 137 acres of Maine land for several years and that it is appraised at $180,000 in 2003.  Suppose that instead of donating their entire interest in the property, Frank and Eleanor choose to donate a conservation easement.  The conservation easement is appraised at one-half the value of the property, or $90,000.  Frank and Eleanor have steady annual income of $100,000. 

Amount of Charitable Contribution:              $90,000

Estimated Income Tax Savings:                    $23,700 over 3 years

Estimated Estate Tax Savings:                     $0 - $44,100

Estimated Property Tax Savings:                 $1,350 per year

Explanation:   The appraisal places the value of the conservation easement at $90,000, so this is the amount of the charitable contribution made by Frank and Eleanor.  They will be able to claim a $30,000 deduction in 2003, 2004, and 2005.  Assuming an average marginal tax rate of 27%, this results in a tax savings of $8,100 in 2003.  Because of lower income tax rates that take effect in 2004, savings will be $7,800 in 2004 and 2005.  The total income tax savings will thus be $23,700 over 3 years.

             As with the previous examples, Frank and Eleanor may also save on estate taxes, depending on when they die and the size of their estate.  In addition, their property taxes are reduced.  Instead of paying tax on $180,000 worth of property, they are now taxed on only $90,000.     

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