How can donating an easement reduce a property owner’s income taxes?

Portage County easement2.fwThe donation of a conservation easement usually is a tax-deductible charitable gift, provided that the easement is perpetual, and is donated “exclusively for conservation purposes” to a qualified conservation organization or public agency. Internal Revenue Code Section 170(h) generally defines “conservation purposes” to include the following: the preservation of land areas for outdoor recreation by, or the education of, the general public, and the protection of relatively natural habitats of fish, wildlife, or plants, or similar ecosystems, the preservation of open space—including farmland and forest land—for scenic enjoyment and pursuant to an adopted governmental conservation policy.

To determine the value of the easement donation, the property is appraised both at its fair market value without the easement restrictions, and at its fair market value with easement restrictions. The appraisal must be done by a certified appraiser who meets IRS requirements. The difference between the two appraised values is the easement value. Detailed federal regulations govern these appraisals.

As an example: A property has an appraised fair market value of $100,000. Mrs. Price, the landowner, donates a conservation easement to a local land trust. The easement restrictions reduce the property’s appraised market value to $64,000. Thus, the value of her gift of the easement is $36,000. Assuming the easement meets the conservation purposes test, Mrs. Price—like any donor of property—is eligible to deduct an amount equal to 30 percent of her adjusted gross income each year for a number of years [check tax code as the specifics are subject to change], or until the value of the gift has been used up. If Mrs. Price has an annual adjusted gross income of $60,000, she can deduct $18,000 a year (30% x $60,000) until she has used up the $36,000 value. In this case, she will use up the gift in two years (2 x $18,000=$36,000), if her income does not change. Easement donors may qualify for greater savings, especially when state income-tax deductions are applicable. Potential donors should seek legal and tax counsel.