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What are the potential tax benefits of a conservation easement?
Author: Stephanie Wiegand
Federal income tax benefits vary with each conservation easement. For your donation to qualify as a charitable gift, which may be deductible from federal income tax, development rights must be granted in perpetuity to a qualified conservation organization, such as Jefferson Land Trust. The value of the gift, which is determined by a formal appraisal, is calculated as the difference between the fair market value of the property before and after the donation of the conservation easement. To be deductible, an easement must serve conservation purposes by preserving natural habitat, historic sites, unique scenic landscapes, wildlife corridors or connections to other protected parcels, areas of concern for public education or recreation, or open spaces in the vicinity of intense land development. In general, maximum allowable deductions are from conservation easements that cover large tracts of open space in areas where development pressures are intense.
Many heirs to large historic estates or tracts of open space — farms, ranches and timberland in particular — face substantial estate taxes. Even if heirs want to keep the inherited property in its undeveloped condition, the federal estate tax is levied not on the current use value of the property, but on its “highest and best use”, or the amount a developer or speculator would pay. The resulting estate tax can be so high that heirs are often forced to sell some or all of the land just to pay these taxes.However, a conservation easement can reduce the amount of estate taxes owed because the donation of the easement reduces the value of the property. This enables your heirs to keep property that may otherwise have to be sold. The easement can be devised (donated) as part of a will, and then deducted from the taxable estate. The gift of a qualified easement usually must be included within the donor’s will to ensure the tax savings. However, changes to the tax code through the Taxpayer Relief Act of 1997 may allow heirs to place easements on the property during the probate period.
When a gift of land is made to a family member or other person, it is subject to federal gift taxes if its value exceeds the maximum tax-free amount. A reduction in the value of the property through a conservation easement may allow a landowner to give more land in any one year without creating a gift tax obligation, or it may help reduce the amount of gift tax owed.
Under Washington property tax law, land subject to a conservation easement can qualify for a reduction in assessed valuation. Jefferson County has adopted a public benefit rating system that it uses to determine the percentage of the reduction. Points are assigned to various environmental factors that have been determined to be of value to the public. A minimum number of points must be accumulated to receive a reduction in assessed valuation. Conservation easements receive 6 points on a scale of 1 to 12, although special attributes of the property may result in further reductions. The maximum possible reduction is 90% of the assessed value.
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