Global Tax Insights
Money for Nothing: IRS Permanently Expands Tax Benefits for Conservation EasementsDecember 13, 2016
The PATH Act enhanced a valuable tax deduction for conservation-minded landowners.
For conservation-minded landowners, the tax code offers an opportunity to claim valuable tax deductions simply by refraining from doing something they didn’t plan to do anyway — develop their property. And last year’s Protecting Americans from Tax Hikes (PATH) Act permanently enhanced the benefits of this tax break.
A conservation easement is an agreement — typically entered into with a government agency or land trust — to permanently restrict some or all of the development rights associated with a property. The owner is free to use and enjoy the land as before, subject to the development restrictions. Plus, if the easement serves one or more qualified conservation purposes — such as protecting natural resources, maintaining the land’s scenic or recreational qualities or preserving historic structures — the owner may claim a charitable deduction equal to the easement’s value.
Historically, the deduction was limited to 30% of the owner’s adjusted gross income (AGI), with any unused deductions carried forward for up to five years. But from 2006 through 2014, the AGI limit was temporarily increased to 50% (100% for qualifying farmers and ranchers), with any unused deductions carried forward for up to 15 years.
The PATH Act reinstated the higher limits permanently, retroactive to the beginning of 2015. Keep in mind that the 50% limit may be reduced if the owner claims other charitable deductions in the same year.
Case in Point
Here’s an example that illustrates the advantages of the enhanced limits. Frank, whose AGI is $100,000 per year, donates a $500,000 conservation easement on undeveloped recreational land. Under prior law, assuming the easement is Frank’s only charitable donation, his initial deduction would have been limited to $30,000 (30% of his AGI). He could have carried it forward for five additional years, which would have resulted in a total deduction of $180,000 for the conservation easement, assuming his AGI stayed consistent at $100,000 per year.
Under the PATH Act, however, Frank can deduct $50,000 per year for a total of up to 16 years. This would enable him to deduct the entire value of the easement over 10 years — again, assuming his AGI stayed consistent at $100,000 per year.
If you’re contemplating a conservation easement, give us a call. Our experienced team of tax specialists can help ensure that the easement is created, valued and substantiated properly.