Conservation easements (CEs) are getting a bad name. A few months ago, the IRS teed up marketed deals as a Form 8886 disclosure item in tax returns. That enters the taxpayer into a painful world of IRS scrutiny that, by comparison, would make a colonoscopy seem noninvasive and painless. But fear not — this only hits those who bought into “too-good-to-be-true” partnership investments sold by tax shelter brokers (see Notice 2017-10 if this may apply).
For farmland owners, CEs remain a viable tool. As an example, assume Art, a grain producer, owns a parcel of tillable land along a river. Occasional flooding and wet spring conditions are an issue. Art places the land in a CE program sponsored by a wildlife organization. Under the easement, the land must never be farmed and is put into a conservation buffer to protect the watershed. The acres are also enrolled in CRP (Conservation Reserve Program), providing Art with rental income.
As a result of the easement, the market value of the land has been reduced. As cropland, the land is appraised at $6,000 per acre, and as grassland under the CE only suitable for CRP rental and recreational use, it is appraised at $4,000 per acre. This diminished value entitles Art to a charitable deduction of $2,000 per acre. If this is a parcel of 50 acres, Art has earned a $100,000 charitable deduction, and yet he retains title and rental income, and recreational use of the land. This deduction offsets up to 50% of Art’s 1040 adjusted gross income; any excess carries forward subject to the same limit for up to 15 years.
Farmland with development value is also a candidate for a CE. Let’s assume a land parcel is near an interstate exit and has high development potential. Forty acres on the right freeway corner might be worth $1 million as development property, but as farmland, it has a value of $200,000.
If the owner places a CE on the property that perpetually restricts development, there would be an $800,000 charitable deduction. If this easement is placed by an active farmer, and the property is required to be maintained in farm production, the deduction offsets 100% of income; otherwise, the general 50% limit applies.
As Yogi Berra might say, perpetuity is a really long time. The grandkids may rue the day the land was locked into non-growing or non-development status. But — it’s your property, your call and your charitable deduction.
Qualifying for a six-figure charitable deduction on property you continue to own is no small deal in the tax law. The compliance details are rigorous: Two appraisals are required, one before the CE at best use valuation and the second after the CE restriction. The difference in the two valuations is the charitable deduction. There are timelines and documentation standards that require expert guidance. Done properly, however, these deductions are solid and can produce a substantial tax benefit to a landowner.
Tax Columnist Andy Biebl is a CPA and tax partner with the accounting firm of CliftonLarsonAllen in New Ulm and Minneapolis, Minn.
You may email Andy at email@example.com