"Looking out over the magnificent grasslands of TLC's Chalk Mountain Preserve in North Central Texas, I thought about how far we had come in the last decade - from 40 preserves to over 100, from 36,000 acres protected to more than twice that much, from a shoestring operation run out of people's living rooms to a professionally-managed, accredited organization that is the largest Texas-based land trust." - Michael Jung, TLC Board President
Do You Qualify for a Tax Deduction?
To qualify for a tax deduction, your donation must be considered a charitable gift by the Internal Revenue Service (IRS). 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 be made only 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.
Appraising Your Property
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. You should consult with a professional appraiser who has direct experience with charitable gifts or easements. Texas Land Conservancy (TLC) cannot provide the appraisal but can provide you with a list of qualified appraisers upon request. The appraisal cost is a necessary expense if you wish to pursue a charitable tax deduction.
Contribution value is the difference of the total market value of your property and the appraised value of your property with a conservation easement. This is the amount that is considered your charitable donation and is, thereby, tax deductible.
A 500 acre property, which is valued at $10,000 per acre, has a market value of $5,000,000.
By placing a conservation easement on the property the market value is reduced to $7000/acre or $3,500,000
Therefore, there is a charitable contribution of $1,500,000. The value of the conservation easement as a charitable contribution is 30 percent of the before-market value. 30% is a good rule of thumb for a reduction in value of rural properties. Properties closer to metropolitan areas or those which have a higher potential for development, may have a greater reduction in value.
How an Easement Deduction Works
In our example, the value of the charitable contribution generated through the donation of the conservation easement is $1,500,000. Let's assume that the landowner's annual AGI is $250,000, which remains constant. The deduction resulting from the easement is as follows: (50 percent of $250,000 = $125,000). The actual tax reduction is a function of your income tax bracket.
Deducting the Cost of Your Easement
Some of the costs incurred in making a charitable contribution are also deductible. Fees and costs associated with compilation of the Baseline 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
Conservation easements can be a useful estate planning tool to reduce estate tax liability and allow ranches to remain in the family. 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.