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Seize tax deduction for land conservation

by on
in Small Business Tax,Small Business Tax Deduction Strategies

Do you own pristine land in the countryside that you would like to preserve for eternity?

Strategy: Donate a “conservation easement” to a qualified charitable organization. The easement generally allows others to enjoy the land or its views and wildlife. As long as you meet certain tax law requirements, you can deduct the value of the benefit donated to the charity.

What’s more, you still own the land, subject to the restrictions imposed by the easement. If you later sell the property, the easement remains in place.

How much is the deduction? The IRS says that 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 the FMV. The appraisal may have to stand up to scrutiny in court.

4 types of conservation easements

To qualify for tax benefits, a conservation easement must fall into one of these four categories.

  1. Preservation of land areas for outdoor recreation or the education of the general public. This category includes property preserved for fishing and boating or land that is set aside for a nature or hiking trail. However, public use of the property must be “substantial and regular.”
  2. Protection of a relatively natural habitat of fish, wildlife or plants or a similar ecosystem. The donation can include land that has been altered by human activities if the fish, wildlife or plants exist in a relatively natural state. Access by the public may be limited for environmental reasons.
  3. Preservation of a historically important or a certified historic structure. In this case, at least some public access is required.
  4. Preservation of open space (including farmland and forest land) that is either (a) for the scenic enjoyment of the general public or (b) pursuant to a federal, state or local government conservation policy that will yield a significant public benefit. In this case, visual access is sufficient and physical access to the property is not required.

Therefore, it’s not always necessary to deal with disturbances and littering by visitors. By allowing the general public to view a scenic landscape from afar, you can benefit tax-wise without affecting the serenity of the land.

Other tax limits to consider

Remember that the other rules for charitable deductions apply. First, your deductions for charitable contributions are 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 normally limited to 30% of AGI, but you can cash in a tax break for 2013 (see box). Third, under the “Pease rule,” certain deductions for high-income taxpayers—including deductions for charitable donations—are reduced. The reduced amount is equal to 3% of the deduction amount over an AGI of $250,000 for single filers and $300,000 for joint filers.    

Finally, don’t forget about the restriction on future development of the land. The easement must be granted “in perpetuity,” which means it lasts forever.

Tip: If you plan to eventually sell the land to real estate developers, don’t use this tax technique.

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