Easement Program


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Tax Benefits

A preservation easement donation may result in tax benefits through the reduction of income, estate, and property taxes.

1) Income Tax Deductions;

2) Estate Tax Reduction;

3) Property Tax Abatement; and,

4) Case Study Example.

Before proceeding with a preservation easement donation, potential easement donors are always advised to consult with their attorneys and tax professionals to understand the specific legal requirements and tax consequences associated with conveying a preservation easement and receiving a tax deduction.

Income Tax Deductions

As an incentive, under the Internal Revenue Code section 170(h), federal law permits the donation of a preservation easement to be treated as a tax-deductible charitable contribution with the property owner receiving an income tax deduction equivalent to the fair market value of the easement, as determined by a qualified real estate appraiser. Based upon development potential under current zoning rules, the property is appraised both without the easement and with the easement in place. The difference between these two appraised values is the easement value.

The income tax deduction can be spread over six tax years and, in the majority of cases, may be applied to the property owner's federal and state income tax returns. Individuals, including Partnerships, LLC's, S-Corporations and Trusts that pass tax benefits through to individual shareholders or beneficiaries, are limited to an annual charitable contribution deduction of 50% of the adjusted gross income prior to the charitable contribution deduction in which the non-cash component (i.e., the preservation easement) cannot exceed 30% of the adjusted gross income. In contrast, Corporations that file IRS Form 1120 are limited to an annual charitable contribution deduction of 10% of the adjusted gross income prior to the charitable contribution deduction. Excess charitable contribution deductions can be carried forward for up to an additional 5 years.


Estate Tax Reduction Back to top

Upon the death of a property owner, the probate court appraises the estate in order to impose an estate tax. Because real estate property often appreciates in value over time, the resulting estate tax can be so high that the heirs must forego family ownership and sell the property to pay the taxes.

A preservation easement donation can often reduce these estate taxes. If a property owner protects the property through a preservation easement donation prior to one’s death or by including the preservation easement donation in one’s will, the value of the easement is deducted from the estate, reducing the value on which estate taxes are levied. As a result, a preservation easement donation can be an effective method for reducing the financial burden of passing property onto one’s heirs.


Property Tax Abatement

A preservation easement donation may result in lower annual property taxes. The tax assessment on an easement-protected property should reflect the property’s reduced value, as determined by the certified real estate appraisal. However, because county assessment practices vary and property tax relief for easement-protected property depends upon a local tax reassessment, a property tax reduction from a preservation easement donation is not always guaranteed, at least not in a timely manner.


Case Study Example Back to top

A preservation easement donation can reduce income taxes, estate taxes, and property taxes. The amount of the tax savings depends upon not only the value of the preservation easement donation but also a taxpayer’s annual income and tax rate.

The following simplified example illustrates the potential tax benefits associated with a preservation easement donation and is designed for general informational purposes only. Prospective preservation easement donors should obtain expert tax advice from a qualified attorney or accountant when considering the tax ramifications of a preservation easement donation.

Assumptions:

Fair Market Value Before Easement
Fair Market Value After Easement

Easement Value

Potential Tax Benefits:

1) Income Tax Savings at 40% Marginal Income Tax Rate:

     $1,500,000 x .40 = $600,000

2) Estate Tax Savings at 55% Estate Tax Rate:

     $1,500,000 x .55 = $825,000

3) Property Tax Savings at 3% Property Tax Rate:

     $1,500,000 x .03 = $45,000/year

 

 

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