Potential Easement Benefits

At Conservation Partners, LLC, we firmly believe that easement donations only will work if donors are concerned primarily with protecting their land from development, and they should look to the tax incentives as a way of partially offsetting the cost of that protection. That said, an easement donor, depending on their financial situation, can potentially benefit from generous federal and state income and estate tax incentives. The following is a list of some of the more important tax benefits available to donors of easements that qualify under applicable law:

  • Federal charitable income tax deduction: The federal income tax deduction, generally equal to the value of the easement, can be used to reduce the donor’s adjusted gross income by up to 50% per year for sixteen years or until it’s used up. Easement donors who qualify as a farmer or rancher (including timber producers) can use the deduction to reduce their adjusted gross income by up to 100% for sixteen years. To qualify, the landowner must receive more than 50 percent of his or her gross income from “the trade or business of farming.” The rules governing the federal charitable income tax deduction for easement donations are complex, and it is crucial that prospective easement donors obtain up-to-date information on relevant federal tax laws from an independent, qualified tax professional.
  • Estate & gift tax benefits: The donation of a qualifying conservation easement will not have gift tax consequences and will remove the value attributable to the easement from the donor’s estate for estate tax purposes. If certain requirements are satisfied, up to an additional 40% of the after-easement value of the land may be excluded from a landowner’s estate for estate tax purposes (subject to a $500,000 maximum).
  • Virginia land preservation income tax credit: The state tax credit, generally equal to 40% of the value of the easement, can be used to offset the donor’s Virginia income tax liability dollar-for-dollar, and any unused credit can be transferred by gift or sale to other Virginia taxpayers. The ability to sell the credit makes it attractive to easement donors who do not have significant Virginia income tax liability.
  • Local real estate tax reduction: By state code, county real estate assessments must consider if your conservation easement has lowered the market value of your land. This doesn’t guarantee a lower real estate tax bill, especially if your land is already enrolled in a land-use program and taxed at farm or forestry use value. However, some counties do offer substantial real estate tax relief for conservation easement properties, and protecting your land can make it more easily qualify for a lower assessment through land-use taxation.

How does the state tax credit benefit an easement donor?

The following is an example illustrating the benefit an easement donor might realize from the Virginia land preservation tax credit. Let’s assume that your 200-acre farm is located in an area where suburban sprawl is starting to occur, and an expert appraiser estimates that you could sell your farm for $500,000.

We’ll also assume your land has significant conservation value, its perpetual protection is consistent with the comprehensive plan, and the easement you’re donating is reasonably restrictive, prohibiting subdivision and most commercial uses other than farming. It allows you to maintain or expand your existing house and build a guest cottage nearby, but no other houses are permitted. Your appraiser estimates that the easement donation will reduce the value of your land from $500,000 before the easement to $300,000 after the easement. Thus, the “value” of your easement is the difference, or $200,000.

If the easement qualifies under applicable law, you will be entitled to a transferable land preservation tax credit equal to 40% of the value of your easement, or $80,000. After you register your credit with the Tax Department, you will own $80,000 of credit that can be used to pay Virginia income tax. You may expect to make enough money in the ten years before the credit expires so that you can use up all $80,000 paying your own state income taxes. But if, like most easement donors, you don’t have that kind of income—or if you would rather have some cash up front instead of waiting—you’ll want to sell part of your credit. You can do that privately or through a transfer agent like Conservation Partners, LLC, who can help you find buyers.

As an important part of our work with landowners interested in conserving their land, Conservation Partners, LLC facilitates the sale of credits for easement donors. Hundreds of individuals and companies look to us every year to supply them with high-quality land preservation tax credits that they use to offset their own state tax liabilities.

For other helpful information see:

Glossary of Key Concepts