Suppose you own real estate property in a pastoral setting that you want to preserve for future generations.
Strategy: Donate a “conservation easement” to charity. The easement generally allows others to enjoy or study the land or its views and wildlife (see box below).
As long as certain tax-law requirements are met, you can deduct the value of the benefit donated to a qualified charitable organization.
What’s more, you still own the land—subject to the restrictions imposed by the conservation easement. If you later sell the property, the easement remains in place. So the new owners can’t build a state-of-the-art golf course or new condo development on the site. The land must be preserved in its existing state.
Q. Didn’t this tax break expire years ago?
A. Technically, it did go off the books after 2009. But the 2010 Tax Relief Act revived the favorable tax-law provision retroactive to Jan. 1, 2010, and extended it through Dec. 31, 2011. Therefore, taxpayers now have until the end of this year, at least, to take advantage of the tax benefits.
Q. How much is a conservation easement worth?
A. It’s difficult to put a price tag on Mother Nature, but the IRS says the deduction is equal to the difference between the fair market value (FMV) without the easement and the FMV with it.
Best approach: Have an independent party appraise the property. Use a licensed professional appraiser with experience and a solid reputation. If the IRS ever challenges the deduction, it will likely call on its own experts to establish FMV. The appraisal may have to stand up to scrutiny in court.
Q. Are there any other special rules?
A. Yes. First, your deduction for charitable contributions is generally limited to 50% of your adjusted gross income (AGI). Second, the annual deduction for charitable gifts of property, like interests in real estate, is limited to 30% of your AGI. Any excess is carried over for up to five years. But the Pension Protection Act of 2006 (PPA) provides some extra tax incentives.
Under the PPA, the usual 30%-of-AGI cap increases to 50% for qualified donations of conservation easements after Aug. 17, 2006. And, if you’re a farmer or rancher earning at least half of your income from the land, you can claim a deduction up to 100% of AGI. Finally, the PPA extended the five-year carryover period to 15 years.
Example: Your annual AGI is $200,000. Prior to the PPA, your deduction for a conservation easement would have been limited to $60,000 (30% of $200,000). For a donation in 2011, you can write off up to $100,000 (50% of $200,000)—$40,000 more than you could have deducted under prior law.
Q. How do potential buyers know that a conservation easement exists?
A. The easement is listed in the local government real estate records. A title search by a buyer, which generally occurs whenever property is sold, should reveal the existence of the easement.
Remember that a donation of a conservation easement must be made “in perpetuity.” In other words, it lasts forever. But isn’t that what you wanted anyway?
Tip: If you plan to eventually sell the land to real estate developers, don’t use this tax technique.
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