Preserving family lands from future development can be a satisfying act of generosity for people committed to protecting the environment. Many valuable sites of historic importance, natural significance, and scenic beauty, protected today, would have been developed had it not been for the generosity of individuals, groups and companies who chose to donate their land to one of the public or private organizations which can accept land and assure that it will remain in its natural state.
For over 40 years, Heritage Conservancy has been working with landowners to preserve their family lands through a variety of techniques designed to carry out the landowner's wishes. Some of these strategies also offer tax incentives for the landowner.
This guide will focus on the four most frequently used strategies: fee simple donation, conservation easement, bargain sale and conservation-based development.
Fee Simple Donation
A fee simple donation is the transfer of a property by deeding it directly to a charitable organization for conservation or other purposes. Tax benefits may apply to the donor.
Heritage Conservancy does not give accounting or legal advice, however, we can provide you with the following hypothetical calculations that you may adjust to your own use and discuss with your tax advisor regarding income tax deductibility.
Tax Benefits - Fee Simple
Example: If one (1) acre of land were appraised at $10,000 and if you were to DONATE it to a non-profit organization such as Heritage Conservancy, you would be able to claim a deduction from federal income taxes on the FULL VALUE up to 30% of your adjusted gross income. Assuming you were in the 35% tax bracket, you would save $3,500 in income taxes.
If you were unable to take advantage of the full $10,000 deduction in the year you donated the property, you could CARRY-FORWARD to unused deduction for up to five additional years for up to $3,500 per year until the full deduction was used up.
Conservation Easement Donation
A conservation easement is a legally binding covenant between current and future property owners and an organization such as the conservancy which preserves significant natural areas (i.e. stream valleys, farmland, woodland, wildlife habitat, unique plant communities) and special natural features of the property by restricting selected uses.
A conservation easement allows a property owner to retain ownership of his property, including the ability to pass the property on to his heirs or sell the property, while still providing for the site's protection. It assures that future use of a property will be consistent with conservation purposes through specific clauses in the easement document. The property remains in private ownership and does not need to be opened to the public.
Tax Benefits - Conservation Easement
Example: A charitable deduction for donation of a conservation easement is valued through appraisal of the difference between highest and best use value of land (based on development potential under current zoning) and restricted value of the land.
Thus if: 10 acres of land is valued at $100,000 with development potential (highest and best use). The same land is valued at $25,000 with restrictions (the valuation will depend on how you restrict use, for instance it will be less if you allow for a building envelope for one residential lot).
The VALUE you GIVE AWAY is the conservation easement value: $75,000.
You then may claim the conservation easement value in the same way you would a fee simple gift, up to 30% of your adjusted gross income, with a possible five-year carry forward to allow you to use the full value of the gift.
In this scenario, if you were in the 35% tax bracket and your donation value is $75,000, your actual total savings in income tax would be $26,250. An easement runs with the property in perpetuity. A third party monitors the easement to assure compliance.
A bargain sale is the sale of a property to a qualified tax exempt organization or government entity for less than the fair market value. A bargain sale provides a tax benefit to the property owner as the difference between the appraised value and the actual sale price is a charitable contribution which is treated in the same manner as the previous scenarios.
Conservation-based development is a process in which development is driven by the preservation of the ecological values of the property as well as the achievement of the economic goals of the owner. This is accomplished by limiting future uses and regulating changes that can be made to the land while providing a reasonable return on the property owner's investment in the land. This technique may use a combination of the above cited preservation tools to accomplish this goal.
In this process the property remains in private hands. The right to sell or transfer in any way remains with the property owner, subject to an easement. This preserves a significant portion of the original tract as "open space" and may afford tax benefits if an easement is donated.