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.
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.
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.
|Fair Market Value Before
Fair Market Value After Easement
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