On
Death, Taxes
& Conservation Easements
(continued)
by J. Ross Pilling II
The
appraisal must be made to determine the "before and after"
value of the property. The before value is the full fair market
value that a landowner would receive with the land only restricted
by usual government regulations and zoning laws. The after
value is the price a buyer would pay for a property encumbered
by the defined conservation easement. To the extent that some
development or house rights are retained, these values may
be enhanced by the contiguous open space. The value of the
easement is the difference between the before and after value.
For example where the family property is worth $1,000,000
to a developer, placing an easement on the property might
restrict its sales value to $300,000. The value of the easement
is thus $700,000. This value qualifies as a charitable contribution
which can be used as a current income tax deduction against
federal and state income taxes as well as an estate tax valuation
reduction.
The final steps are to engage professional counsel to finalize
the terms of the easement agreement and to calculate the tax
benefits. The easement agreement is a highly flexible document
that can and must be tailored to the unique needs of each
property owner and his or her heirs. Good tax counsel is requisite
to an understanding of the family's ability to utilize the
deductions generated.
The financial benefits to a landowner of making a donation
of a conservation easement are three fold: Lower estate taxes,
an income tax deduction as well as the potential for lower
property taxes. Depending on the land value as well as the
family income and tax profile, each of these benefits can
be substantial.
The income tax deduction of the conservation easement is based
on the charitable contribution of the value of the conservation
easement. According to the Internal Revenue Code, this value
can be claimed as a current deduction against 30 percent of
the donors adjusted gross income (AGI). Any excess may be
carried forward for an additional five years. If a donor has
an AGI of $100,000 and makes a gift of an interest in appreciated
property he or she may thus deduct only $30,000 in the current
year but may claim the unused deduction in each of the successive
five years as well. Should the value of the easement exceed
the ability to use the deduction over six years, the easement
might be phased in over several years.
In the case of the estate tax, the donation of the conservation
easement can be a critical element in estate planning and
may prove to be a significant factor in a family's ability
to retain a cherished piece of land. To the extent that the
value of the property is reduced by the conservation easement,
the amount of the estate tax is also reduced. In the earlier
example, a property worth $1,000,000, the $700,000 easement
value would result in a taxable value of only $300,000. The
estate taxes due in nine months would be reduced to $165,000
from $550,000 yet the family would retain sole ownership of
the whole property.
Local
property taxes are based on assessed value that is predicated
on the highest and best use permitted by local zoning. If
the land can no longer be developed because of the legally
binding nature of the conservation easement, a tax appeal
may result in a significant reduction in annual property taxes.
There are unfortunately some localities that are unable to
grant this relief because of uniform assessment procedures.
However many taxing authorities do have preferential assessment
procedures for open space properties that meet their criteria.
The above approach to family lands
can thus merge two goals: land protection as well as financial
return. It can help preserve the natural character of a family's
private property while enhancing its residual value for future
liquidity needs. This approach is highly flexible, accommodating
as much or as little development on suitable grounds as is
deemed appropriate. Upon the adoption of such a plan, the
family will enjoy the benefits of:
-
flexibility
to make private family decisions of what to do with their
property and when
- preservation
of significant family assets
- economic
rewards of tax benefits
- stepped
up value of reserved development opportunities enhanced
by adjacent open space.
By taking the proactive approach to these challenges, the land
owner will reap the greater reward, not the IRS, not the real
estate brokers, and not the developers.
This article was published
in edited form in the second quarter 1996 issue of the Newsletter
of the Family Office Exchange. Ross Pilling is a principal
in the Conservation Development Partnership which works with
land owners to create conservation oriented/tax efficient
solutions to preserving family owned properties.
