TAX BENEFITS OF CONSERVATION EASEMENTS

Appraisals
In order to qualify for tax benefits for a donated conservation easement, landowners must get an appraisal by a qualified appraiser, one who is familiar with conservation easements and follows "Uniform Standards of Professional Appraisal Practice," to determine the value of the rights being retired. Appraisers will use a "before and after" method, in which the "before" value is a typical real estate appraisal of full market value; the "after" value is the reduced value once certain development rights are retired through the conservation easement; and the difference between the two is the conservation easement value. Remember that you will still own and manage the land, but the more development rights you voluntarily retire, the greater the value of your conservation easement.

For Example:
If you own a property with a full market value of $2 million (before value), it could be reduced in value to $1,200,000 with a conservation easement (after value). The difference of $800,000 is the appraised value of your conservation easement, which constitutes a charitable contribution and is the amount you can use toward the tax benefits described below.

(Disclaimer: Taos Land Trust is not an appraisal or an accounting business. The specific numbers and examples used are only to illustrate in simplified terms how tax benefits work.)

New Mexico State Land Conservation Tax Credit
The tax benefits of conservation easements can be a great incentive for landowners, but most are designed to benefit people with enough income to make them worthwhile. In New Mexico, the Land Conservation Income Tax Credit, on the other hand, is transferable. That means that landowners who are not in a high-enough income bracket to use the credit can sell it to a third party for direct income. By placing a conservation easement retiring some or all of their development rights, which benefits the public by permanently protecting important conservation resources, any landowner at any income level can qualify for a tax credit worth 50% of the appraised value of the conservation easement (see appraisals above) up to a maximum of $250,000. Multiple landowners on the same deed can each qualify for a separate tax credit. Working through an established brokerage system, most landowners get a net payment of about 80% of the face value. Once the credit is established it can be used or sold over 20 years.

For Example:
Using the appraisal example above, a conservation easement valued at $800,000 would qualify an individual landowner for a tax credit of $250,000 (50% of $800,000 is $400,000, but the credit is limited to $250,000). Through a tax credit broker, the landowner can sell that credit for up to $200,000. If a husband and wife are both named in the deed, they are each entitled to the maximum credit. In this case, they could split the full $400,000 allowable into two credits, which they could sell for up to $320,000 (tax credit sales are subject to income tax, so check with your accountant about that). Landowners may also choose to keep and use any portion of their state tax credit over 20 years from the year of the donation.

New Mexico is one of only three states with a transferable income tax credit for conservation easements. Landowners who permanently protect their land provide an invaluable public service by helping maintain healthy watersheds and wildlife habitat, growing food and fiber, and saving beautiful, open landscapes. Through this program they are appropriately rewarded for it.

Click here for more details on the New Mexico Land Conservation Tax Credit.

Federal Income Tax Deduction
As with the State Tax Credit above, a donated conservation easement that benefits the public by permanently protecting important conservation resources, and meets other federal tax code requirements, can qualify as a tax-deductible charitable donation. Currently, landowners can deduct up to 50% of their Adjusted Gross Income (AGI) each year from federal income tax for up to 16 years in a row, or until they use up the appraised value of the conservation easement. Farmers or ranchers who make at least half of their income from the land under conservation easement can deduct 100% of their income for up to 16 years.

For Example:
Using the appraisal example above, a landowner with a $100,000 annual AGI could deduct $50,000 per year from their federal taxable income for 16 years, with a total tax savings of $800,000, using up the entire value of the charitable contribution. A farmer or rancher, or someone with higher income, could use up the charitable contribution amount in this example in less time, or could use up an even higher charitable contribution.

Federal Estate Tax Benefit
A very important benefit for many landowners is that conservation easements can be essential for passing undeveloped land intact to the next generation. By removing the land’s development potential, the easement typically lowers the property’s market value, which in turn lowers potential estate tax. Beyond the appraised value of the land, IRS allows the taxable value of property with a conservation easement to be reduced up to 40% more for estate tax purposes. Conservation easements placed postmortem within a certain amount of time also qualify for this benefit.

For Example:
Using the appraisal example above, the property is already reduced in taxable value to $1,200,000. An additional 40% reduction brings the taxable value to $720,000, far below the amount that IRS has excluded from estate tax for most years. Estate tax policy is a moving target and changes frequently. Currently, up to $5 million can be excluded, so it is not much of a concern for most landowners. In recent years, however, the exemption has been as low as $1 million with the top tax rate at 55%—in our scenario above that would mean that heirs could be liable for a tax payment of up to $1,100,000 on a $2 million dollar property without a conservation easement in place. Planning ahead will minimize the chance that your heirs will have to sell the land just to pay the estate tax.

Reduction of Property Tax
In some counties and municipalities the local assessor will reduce property taxes based on the reduced value of land protected by a permanent conservation easement. In Taos County, specifically, "the County will place a valuation on this land based upon only the uses of the land permitted by the easement. . . ."

Check with your local assessor to find out what property tax reductions are available to you with a conservation easement.