Friday, December 1, 2006
Land protection tax break grows during 2007
If you have ever considered putting all or part of your property under a Conservation Restriction or Easement to preserve a vista, protect a wildlife habitat, preserve an historic feature, or assure permanent agricultural use of your land, 2007 is the year in which to act. Why now? Because the federal government has passed legislation that offers greatly increased tax incentives to do so, incentives that will expire in 2008.
For many donors, the federal income tax deduction has been quadrupled over the levels offered prior to 2006 and allows substantially increased time and flexibility in "carry-forward " years. Before describing these enhanced incentives, the terms Conservation Restriction and/or Conservation Easement should be clarified. The two terms are interchangeable, but the former reflects Massachusetts law, while the latter is used in most other states.
What is a CR?
Quite simply a Conservation Restriction or Easement is a written agreement between an owner of real property and a governmental entity (such as the Town of Carlisle) or qualified private non-profit conservation trust (such as the Carlisle Conservation Foundation) to keep the land permanently in a predominantly natural, open or scenic condition, or in farming or forestry. Under such a restriction, a donor still owns the land, can live on it while observing the conditions described in the agreement, can even sell it; but both the donor and any future buyers are constrained by the conditions specified in the document. In other words, future development is precluded or restricted as directed by the donor and accepted by the donee.
Details of tax break
Under the new federal law, the value of a land donation by either an individual or a corporation can be deducted up to 50% of the donor's Adjusted Gross Income (AGI) for the year in which the donation is made, while any unused portion of that stated value can be deducted over a 15-year period — again up to 50% of the AGI for each year in which a further deduction is taken.
In the case of a "qualifying farmer or rancher," whether an individual or a corporation, the deduction may be taken up to 100% of the donor's AGI for an individual or 100% of the donor's taxable income, if a corporation.
A basic example
Assume a taxpayer with an AGI of $100,000, who donates a Conservation Restriction with an appraised value (the difference between the market value of his land before and after the gift) of $400,000. That means that, at 50% of his AGI, he would be eligible to deduct $50,000 from his income for that first year, leaving $350,000 to be used over the next 15 years. Assuming that his AGI and all other pertinent factors remained the same, in seven more years he would be able to deduct the entire value of his gift. If his AGI should rise over those years, he probably would choose to reduce the balance in less time: if his AGI dropped, it would take longer.
Under the law as it existed prior to 2006 (and probably after December 31, 2007), an individual with a similar AGI and a similar conservation land donation would have been allowed to deduct only 30% of his $100,000 AGI during the year of the gift, and the carry-forward period was a mere five years. Hence that same taxpayer would have been eligible to deduct $30,000 in the year of the gift, leaving $370,000 for future years. With only five more years of carry-forward ability if his income remained constant, he would have left $220,000 undeductible.
Farm land example
The same basic computations apply to the 100% conservation deduction allowed to "qualifying farmers or ranchers." A qualifying farmer is a taxpayer or corporation whose gross income from agricultural activities (including forestry) is greater than 50% of his gross income for the taxable year in which the donation is granted. In addition, the restriction must specify that the property will "remain available" for agricultural activity, though it need not be actively farmed or in forestry at any given time.
As a rough example, an agricultural taxpayer with an AGI of $200,000 earns $105,000 from his agricultural operations. He donates a Conservation Restriction with a market value of $600,000, making him eligible for a $200,000 deduction in the year of his gift, and leaving $400,000 for ensuing years. If his income remains the same, in two more years he will have been able to deduct the full value of his gift.
Compare this scenario to that of a corporate taxpayer prior to 2006. Such a corporation, whether agricultural or not, could take only 10% of its gross income in the first year, and had only five years in which to deduct the rest. Hence in the case described above, the first year's deduction would have been a mere $20,000, with only five more years to deduct the balance at the rate of $20,000 per annum. Thus only $120,000 of the $600,000 gift would have been deductible.
The obviously simplified examples given above mask the complex set of procedures involved in qualifying for the income tax deductions. First, any restriction must protect important conservation values as recognized in the statute, and the agency or trust chosen to monitor its future performance must be capable of protecting its values. Second, the claimed market value of the gift must be based on a strict, objective analysis by a qualified appraiser. Finally, the donor should engage the services of a qualified tax professional to assess the impact of the donation on that individual, family, corporation or farmer.
Volunteers ready to help
Fortunately Carlisle's Conservation Restriction Advisory Committee (CRAC) can offer an admittedly preliminary evaluation of a potential donor's situation. They are also familiar with the local procedures involved in the preparation and implementation of Conservation Restrictions and have helped guide a number of Carlisle donors through the process. Those considering taking advantage of the present federal generosity should also be aware that local real estate assessments are also affected by the inevitable reduction in the market value of restricted conservation properties. For more information, consider giving CRAC members Ken Harte or Wayne Davis a call.
© 2006 The