These tax credits make land conservation a steal

Kayleigh Kulp, special to
Little-known tax credit for land conservation donations
Little-known tax credit for land conservation donations

Michigan farmer Ken Engle wanted to keep his 300-acre spread of vineyards and fruit trees with the exquisite view of Lake Michigan in his family forever. He wasn't sure he could afford it.

"We're under very high development pressure in this area," said Engle, 69, who lives in Williamsburg, Mich., near Traverse City.

Yet thanks in part to a little-known federal tax incentive for land conservation donations, ranchers and farmers like Engle can harvest income tax savings on 100 percent of their annual income for 16 years. All other donors can deduct up to 50 percent.

He can pocket the savings or reinvest in his business while at the same time preserving his land for future generations.

"If I develop the land, it becomes a commodity. I sell it one time and then I can't do anything with it," Engle said. "If I conserve it, it's a resource. I can grow something and create income for many years."

A land conservation easement is a permanent, legally enforceable agreement between a property owner and a land trust or government entity, which is recorded with local governments and ensures that a parcel will continue to serve certain conservation purposes.

How it works

To get the process going, an owner contacts a local land trust, of which there are about 1,100 nationwide. If the trust agrees that the property has a public benefit, it can then become eligible for the tax break, as long as IRS guidelines are followed.

Ken Engle (far right) with his family on his protected farm.
Source: Grand Traverse Regional Land Conservancy

What kinds of property qualify?

It could be land that preserves open space, or is deemed to be historically important. Land with a scenic vista or a critical water source or wildlife habitat may also qualify. The landowner pays for an appraisal that determines the value of the land "as-is," and the value of the property as restricted by the easement. In some cases, the land trust pays for associated expenses like a survey, document preparation, title work and future enforcement.

The difference between the two numbers is the charitable "donation" to the land trust, and the amount of the total federal tax deduction the owner can take over 16 years (or less).

For example, say your income is $200,000 and you donate an easement worth $500,000. A farmer, rancher or a forester could deduct the full $200,000 in the year they donated the easement, and their full income in each subsequent year, until the entire $500,000 deduction is reached. All other donors can deduct 50 percent of their income until they reach the full $500,000 for up to 16 years.

If I develop the land, it becomes a commodity. If I conserve it, it's a resource.
Ken Engle
Michigan landowner

A landowner may also realize local property tax savings through a lowered property value assessment after the easement is granted, said Glen Chown, executive director of the Grand Traverse Regional Land Conservancy in Michigan. Sixteen states offer their own tax incentives, some of which may be transferable to future owners.

Like any gift from Uncle Sam, there are strings attached. It does not apply to outright grants of land. Also, the easement donation cannot be used as part of a strategy in which an easement is given in return for a permit or other compensation. An easement may permit the construction of new buildings and even additional homes, as long as they don't interfere with protections in the easement.

Most local trusts require regular follow-ups to ensure compliance. The easement is permanent and cannot be undone except under the most extraordinary of circumstances, said Russ Shay, director of public policy for the Land Trust Alliance, which provides support to land trusts nationwide,

For example, Chown said the Grand Traverse Regional Land Conservancy annually visits over 200 properties with easements in force.

"A lot of farmers we work with are pro-property rights. They're very conservative and it's really important that they understand we are not going to tell them how to farm their land," Chown said. "What is protected is very specific…primarily it's about preventing really important conservation land from being developed."

Get legal help

Landowners should enlist their own legal representation to make sure their needs are being met with the easement, Shay said.

"[Conservation easements are] highly negotiated documents. Their negotiating room depends on the circumstances of the property," said Steven Barshov, a partner attorney with the New York City environmental firm, Sive, Paget & Riesel. The firm helps individual and organization clients with conservation easements.

Potential donors should also speak with a tax advisor about how to maximize the incentive, as well as family members who may be affected by the permanence of the decision, he said.

"For many land owners it is an important and difficult financial calculation," said Shay. "Some people can't afford to do it. If not, "a land trust can help a donor conserve their land in other ways," such as buying the property from the donor, he added.

"If the land is really worth a lot to [preservation groups], there could be a purchase price for the conservation itself. It's not just the tax incentives," Barshov said.

It's also important for donors to have all their documentation in order to avoid IRS scrutiny, said Fred Slater, a certified public accountant with MS1040 LLC in New York City. That begins by using a qualified appraiser, who is listed on the donor's tax return. That way, the value of the donation is clearly substantiated.

"Donors don't want to spend their time fighting with the IRS," he said.

While it may be "more profitable for a land owner to sell their land for development, if everyone did that, it would be a worse world," said Shay.