Tax Considerations for Landowners (Current as of 1/1/2011)
Summary of Tax Benefits Available to Individual NC Landowners
The individual donor of qualifying conservation lands may claim the value of his/her gift as a deduction for income, gift, and estate tax purposes.
Federal Income Tax Incentives
Donations of land or conservation easements and sales of land or conservation easements at below fair market value (“bargain sale”) that qualify under Section 170(h) of the Internal Revenue Code as conservation contributions to qualified holders (such as PLC) are deductible as charitable contributions. The amount of the deduction is determined by the following:
For a gift of land, the deduction is the fair market value of the property.
Deduction = fair market value (as determined by appraisal)
For a bargain sale, the deduction is determined by subtracting the price the property sells for from the fair market value of the property as determined by an appraisal. The difference is the deductible amount.
Deduction = fair market value minus sale price
For a donation of a conservation easement, the deduction is determined by an appraiser using the “before and after test” – the value of the property as restricted by the conservation easement is subtracted from the fair market value of the property before restrictions were granted. The difference between the two values is the value of the conservation easement “Conservation Easement Value.”
Deduction = Conservation Easement Value
For a bargain sale of a conservation easement, the deduction is determined by subtracting the price paid for the Conservation Easement from the Conservation Easement Value, as determined by the “before and after test” described above.
Deduction = Conservation Easement Value minus Price paid for Conservation Easement
Prior to 2006, the tax code limited the amount of the deduction that could be claimed in the year of the gift to 30% of an individual’s adjusted gross income (AGI). If the amount of the deduction was too large to use in the year of the donation, a taxpayer had an additional five years in which to use the deduction. For 2011, enhanced federal tax benefits allow a taxpayer to take a deduction of up to 50% of his AGI and allow any unused portion of the deduction to be carried forward for 15 years. Special rules apply that allow qualifying farmers and ranchers (generally someone who derives more than half of his income from farming) to take a deduction of up to 100% of AGI. These enhanced benefits help farmers of modest incomes to get the maximum benefit from the donation of a conservation easement on their land. These enhanced benefits only apply to donations of conservation easements (not donations of land) and will expire at the end of 2011.
North Carolina Income Tax Incentives
North Carolina offers a tax credit program to promote conservation of ecosystem functions (fish and wildlife conservation), ecosystem services (farmland conservation) and other public benefits (access to public trails, waters and beaches.) If the property or easement donation is certified by the NC Department of Environment and Natural Resources as promoting one of these conservation objectives and the donation or bargain sale is made to a qualified recipient, the donor may claim a special income tax credit (i.e. dollar-for-dollar reduction in state income tax owed) equal to 25% of the federal income tax deduction, up to $250,000 (for individuals) or $500,000 (for corporations.) The credit is not transferable. Any unused portion of the credit may be carried forward for up to five years. Qualifying for the federal deduction does not automatically qualify the donor for the State income tax credit.
Estate and Inheritance Tax Incentives
Donations and bargain sales of land and conservation easements can serve as important estate planning tools. Landowners who donate or make a bargain sale of a conservation easement can reduce estate and inheritance taxes by reducing the value of property they hold. Life estate, charitable remainder trusts, bequests by will and other methods provide a variety of options for landowners to reduce estate and inheritance taxes. If you are interested in learning more about these planned giving options, please contact our office for more details.
Local Property Tax Incentives
North Carolina law requires county tax assessors to consider the effect a conservation easement has on the value of the property subject to the easement when assessing ad valorem taxes on that land. The effect a conservation easement will have on the county property taxes you pay will depend on the terms of the easement and the tax assessor’s determination of the value of the land. If your land is already in a deferred tax program and being taxed at its present use value, it is unlikely that a conservation easement will reduce your property taxes.
If you have any questions regarding this information, please contact Piedmont Land Conservancy at (336) 691-0088.
This information is provided as a general guide and is not a substitute for tax advice from a qualified attorney or accountant regarding your specific situation.
