If you own a large property, taxes may be a major concern for you. There are property taxes to consider, and estate taxes can make it difficult to pass on your land to your heirs. These taxes can be a serious burden on family farms and estates. However, there are also tax benefits you can access as a landowner to help reduce your tax liability. These can include conservation easements, land donations, and estate tax breaks.
When you own a large piece of land, but don’t develop it, you are engaging in a bit of conservation. Your patch of forest or meadow is a habitat for wildlife, a carbon sink, and a crucial part of the local watershed. The government encourages landowners to leave some of their land undeveloped by offering tax breaks.
Instead of selling your land to write off the donation, you can actually donate some of the value of the land. Selling some of the land use while keeping the land itself is called an easement. Thus, when you donate your right to develop your land, while retaining ownership of the land, this is called a conservation easement.
You will have to have an expert assess your land and determine the value of the easement. This depends on what the land would be worth if you developed it, compared to what it is worth under the restrictions you intend to accept. You can deduct the value of this land on your taxes—but not all at once. You can deduct up to 50% of your adjusted gross income that year, and then carry it forward and do the same for the next 15 years. Farmers and ranchers are allowed to deduct up to 100% of their income each year this way.
Benefits and Limitations
When donating a conservation easement, you’ll need to work with a land trust. This trust will help determine if your land has value for conservation—not every property qualifies. They can also help you organize your documentation and connect you to appraisers and other professionals you will need. Or, if it turns out you can’t get an easement, you can sell or donate a piece of your property to the trust outright.
The terms of a conservation easement are subject to negotiation. You may, for instance, want to retain the right to keep one home on the property or to farm it in a specific way. In many cases, you still can.
Conservation easements are granted in perpetuity—you can’t just put off developing it for a few years. This may affect future buyers of the land or your heirs as well. The bright side of this is that it will also reduce the value of your land in future property tax assessments. You will probably need to have the trust follow up regularly to verify you are still following the terms of the easement.
In some states, you may also be able to participate in state-level programs to reduce your state income or property tax.
Estate Tax Breaks
A common concern with family properties is that, when the original owner passes away, the estate taxes are so large that the property will need to be sold to pay for them. This is doubly tragic if, for example, the land where the family used to spend time together in nature gets turned into a housing development. Fortunately, there are reductions in estate tax when you have a conservation easement.
First, the value of your land is lowered because of the easement. Instead of being valued based on how it could be developed, its value is now based on the limited uses written into your easement. In addition, heirs can exclude 40% of the value of land under a conservation easement from the taxable value of the estate. Between these two benefits, the estate tax can be drastically reduced. If you have a property you intend to keep undeveloped and in the family, getting an easement now will help your family keep it in the future.
Learning About Your Options
There are several sources you can use to learn about the possibilities for your land. First, you should seek out your local land trust. They can tell you if your land has conservation value and how to go about the process in your area. Second, talk to your financial advisor. They can look at your tax situation and show you how an easement could lighten your tax burden. Finally, you may end up hiring a lawyer to help you navigate your easement.If you don’t currently have a financial advisor, hiring one can help you make the most of your resources. To meet the right professional for you, contact us today.