Protecting your land may result in federal income tax, estate tax, and/or property tax benefits. Here are some basics about these financial considerations for the donation of land or donation of a protection agreement. This should not be considered tax advice; please consult with your legal, tax or financial advisors on the details of your particular situation.
Federal income tax benefits and considerations
When donating a conservation agreement or donating land, this donation is considered a charitable gift for federal income tax purposes. That means that you may be able to deduct the value of the donation on your taxes. Here is how it works.
First, the value of the donation must be determined by a qualified real estate appraiser. For donated land, the value is the appraised value of the land at the time of donation. For a donated conservation agreement, the value of the conservation agreement is the difference between the value of the land without the agreement and the value of the land after the restrictions have been applied and the development rights have been removed.
Example: The Smith family donates a conservation agreement on its 80-acre farm to a local land trust. If the property\'s current value is $5,000 an acre, its total fair market value before the agreement is in place would be:
80 acres x $5,000/acre = $400,000
If removing the development rights lowers the value to $2,000 an acre, the then total market value of the restricted property would be:
80 acres x $2,000/acre = $160,000
The difference between the before and after values is the value of the conservation agreement donation:
$400,000 - $160,000 = $240,000
After the value of the donation is determined, this value is deductible at an amount up to 30% of the donor\'s adjusted gross income (AGI) in the year of the gift. If the donated value exceeds this amount, the excess can be carried forward and deducted (subject to the percentage limit) for up to five succeeding tax years.
Example: The value of the Smiths\' Conservation Agreement is $240,000. If their AGI in the year of the donation is $50,000, they would be able to deduct $15,000 (30% of $50,000) in the first year. Since the value of the agreement is greater than their allowable deduction, the Smiths would also be able to deduct $15,000 per year (assuming their income stays the same) until they had claimed the full amount of the donation, or for up to five years, whichever comes first.
If the landowner receives compensation in exchange for a conservation agreement, the Internal Revenue Service treats the income as a capital gain. For most taxpayers, the applicable tax rate is 15% of the payment received. Landowners may be able to reduce or defer the tax due by purchasing another income-producing asset such as another parcel of land (this is known as a “1031 Exchange”), or they may be able to reduce the tax due by donating a portion of the appraised value.
Estate tax benefits
By donating a conservation agreement or donating land, you may be able to reduce estate taxes. The conservation donation -- whether made during a landowner\'s life, by bequest, or by the heirs while settling the estate -- can reduce the value of the estate upon which taxes are calculated. In addition, all properties with qualified conservation agreements receive an additional 40% reduction off the entire value of that property, for the purposes of calculating the estate. In some cases, the value of an estate after a conservation agreement donation may fall below the lifetime exemption so that taxes are avoided altogether. Good planning is necessary to ensure that heirs of estates that include property receive maximum tax advantages.
Property tax benefits
If a conservation agreement is placed on the land: Whether a property will realize a tax benefit or not depends on how it is currently being taxed. If the property is currently being taxed on its full development potential and those rights have been permanently relinquished, then the landowner has standing to make a case to the local assessor for a reduction in property assessment. If that is granted, a property tax reduction will occur.
In addition, in Michigan, conservation agreement properties are exempt from the reassessment and subsequent substantial increase of property tax that ordinarily occurs when a property changes hands. If you sell your land, you should have an advantage in the market because of the comparatively lower property taxes for the buyer. If you pass on your land to your family, they will benefit from the comparatively lower
In the case that the land is donated or sold outright, you would no longer be responsible for the property taxes. The property taxes would become the responsibility of the new owner.
Purchase of Development Rights
In some cases, your land may qualify for a Purchase of Development Rights (PDR) program. PDR works in a similar way to donated conservation agreements. The key difference is that the landowner is compensated for all or part of the fair market value of the development rights, and a cash payment is made in exchange for the landowner protecting their land.
Sale of Property
In some cases, your land may qualify to be purchased outright by a local government or nonprofit program. With the sale of the property, the landowner would be compensated for all or part of the fair market value of the land, with a cash payment made in exchange for ownership.