Sometimes, a family will have land and they want to keep it just the way it is. They don’t want the land developed. They want the family to continue to farm it just as they have for generations.
In the right circumstances, a charitable conservation easement can be a useful tool to help achieve this goal. The donor must be willing to put an easement on the property in perpetuity. The easement prohibits development but allows prior use, like farming. There are many more requirements which must be navigated. The charitable income tax deduction is spelled out in IRC section 170(h)(5)(A). If the land qualifies, the deduction is for the difference in the value of the land before the easement and the value of the land subject to the easement. (There may also be an estate tax exclusion available under section 2031(c) in addition to the property’s reduced value.)
Let’s look at an example:
The Smith family came from Europe to the United States three generations ago. They settled on a farm. They’ve been growing crops and raising livestock on the land ever since. Bob Smith is the current owner of the Smith farm. He’s getting up in years. Things have really changed since he was a boy. The farm used to be a two-hour drive from a major city. After new highways and suburban expansion, the farm is now surrounded by houses on three sides and is adjacent to a state park on the fourth.
As a farm, his land is worth about $1 million. Due to development pressures, the land would now sell for $2 million. Bob wants to keep the land in the family.
Assuming the land qualifies, if Bob places a conservation easement on the land, he and his family could continue to keep farming as they have for three generations. They just couldn’t develop the land. In exchange, they’d get a charitable deduction for the $1 million reduction in value. As with other charitable deductions, it would be subject to limitations based on Bob’s income, but the excess could be carried forward for five years. Once the land is subject to the easement, it’s fair market value would be lower in his estate at his death. It may even lower his property taxes, though that depends upon his local taxing authority.
Perhaps the biggest benefit to Bob is that his children won’t be pushing him to develop the land anymore!
A conservation easement may be a great way to achieve your goals while reaping tax benefits, too. Here’s more information. However, be sure to avoid promoters pushing the abusive transactions laid out by the IRS in Notice 2017-10.
Estate Planning is about far more than documents. It’s also about the knowledge and experience of the attorney who drafts the plan.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128