Expanded Tax Incentive Q & A

(For specific information regarding tax incentives for a conservation easement, please consult an experienced tax advisor.)

1.  How does the bill change the current tax incentive for conservation donations?

The new law:

• Raises the deduction a donor can take for donating a conservation easement from 30% of their adjusted gross income in any year to 50%;
• Allows qualifying farmers and ranchers to deduct up to 100% of their income; and
• Extends the carry-forward period for a donor to take tax deductions for voluntary conservation agreements from 5 to 15 years.

2.  Can you give me an example? 

Under the previous rules, a landowner earning $50,000 a year who donated a $1 million conservation easement could take a $15,000 deduction for the year of the donation and for an additional 5 years – a total of $90,000 in tax deductions. 

The new rules allow that landowner to deduct $25,000 for the year of the donation and then for an additional 15 years.  That’s $400,000 in deductions.  If the landowner qualifies as a farmer or rancher, they can zero out their taxes.  In that case, they could take a maximum of $800,000 in deductions for their million dollar gift. 

3.  Can anyone deduct more than the value of their gift?

One can never deduct more than the fair market value of the gift.  This change simply allows landowners who previously could not deduct the full value of their gift to deduct more of that value.

4.  Who qualifies as a farmer or rancher?

The new law defines a farmer or rancher as someone who receives more than 50% of their income from “the trade or business of farming”.  The law references an estate tax provision (Internal Revenue Code (IRC) 2032A(e)(5)) to define activities that count as farming.  Specifically, those activities include:

• cultivating the soil or raising or harvesting any agricultural or horticultural commodity (including the raising, shearing, feeding, caring for, training, and management of animals) on a farm;
• handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of the commodity so treated; and
• the planting, cultivating, caring for, or cutting of trees, or the preparation (other than milling) of trees for market.

The qualified farmer or rancher provision also applies to farmers who are organized as C corporations.  For an easement to qualify for the special treatment, it must contain a restriction requiring that the land remain “available for agriculture”.

5.  Do these changes apply to gifts of land?

This expanded incentive applies to the various specific gifts of partial interests in land specified as a “qualified real property interest” under IRC 170(h)(2).  A landowner who is considering a gift of their entire interest in a piece of land should consult with an attorney to determine whether he or she may be able to utilize this new incentive.

6.  Does this only apply to conservation easements?

The expanded incentive applies to all donations covered in IRC section 170(h)(2), which includes donations of the entire interest of the donor other than a qualified mineral interest; a remainder interest; or a permanent conservation or historic preservation easement.

7.  What is the timeline for this expanded incentive?

The new law applies to all easements donated in 2006 and 2007.  If a donor qualifies under this provision, they can continue to apply its formulas to the amount of their contribution that they carry over into years beyond 2007.

8.  What other restrictions apply?

Conservation easement donations are subject to the same restrictions as they were before.  For example, easements must meet the “conservation purposes” test defined in the existing law; they cannot be donated as part of a “quid pro quo” agreement; and they must be donated to a qualified organization – a governmental unit or a publicly-supported charity that has “a commitment to protect the conservation purposes of the donation, and …the resources to enforce the restrictions.”

Learn more about Treasury Regulations on conservation easement donations.

9.  Will donors who use this provision be audited?

Taking advantage of this new law will not necessarily affect one’s likelihood of being audited.  All donors should note, however, that the IRS has been increasing the number of tax returns it audits – the number has doubled in the last two years.  The IRS has also indicated that high value donations of property – including donations of conservation easements -- will receive more attention from the IRS than most tax returns. That makes it particularly important for a donor to know and follow the law, and utilize a reputable, professional appraiser who has experience in the appraisal of conservation easements.