Strategy: Donate a conservation easement to a qualified government entity. The easement allows others to enjoy or study the land or its wildlife. So long as you meet all the requirements, you can deduct the value of the benefit donated to charity.
Best of all, you still own the land in its entirety. In the event you eventually sell the property, the easement remains, so the new owners can’t pave over the property or build a golf course on it. The land must be preserved in its natural state.
How much is a conservation easement worth? It’s difficult to put a price tag on Mother Nature. The IRS says the deduction is equal to the difference between the fair market value (FMV) without the easement and the FMV with it.
Suggestion: Have an independent party appraise the property. Use a licensed professional with experience and a solid reputation. If the IRS ever challenges your deduction, it will probably call on its own experts to establish FMV. The appraisal you provide may have to stand up to scrutiny in court.
Normally, annual charitable deductions can reach as high as 50% of your AGI. But there’s a special rule for gifts of property like conservation easements in real estate. In this case, your annual deduction generally is limited to 30% of your AGI. You carry over any excess for up to five years.
New tax break: The Pension Protection Act of 2006 (PPA) increased the usual 30%-of-AGI cap to 50% for qualified donations of property after Aug. 17, 2006. If you’re a farmer or a rancher who earns at least half of your income from the land,you can claim a deduction up to 100% of your AGI. What’s more, the five-year carry-over period is increased to 15 years.
Example: Let’s say your annual AGI is $200,000.Prior to the PPA, the IRS limited your deduction for a conservation easement to $60,000 (30% of $200,000). Now you can write off up to $100,000 a year (50% of $200,000): $40,000 more.
PPA provisions for property gifts officially expired after 2007. But the new farm act retroactively extended these tax breaks through 2009.
Tip: Remember that a conservation easement donation is forever. If you plan to sell your land to real estate developers, you might as well sit tight.