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Conservation Committee

Qualified Conservation Easement Opportunity

Background

Congress has continued to allow enhanced charitable contribution deductions associated with conservation easements. A qualified conservation easement allows a taxpayer to claim a charitable deduction for a permanent easement restriction placed on their real estate, while retaining full ownership and use of that real estate. Typically, a lakeshore easement would permanently restrict any future development of the property, but allows the property owner to retain possession, ownership and use of that property.

The diminished market value of the property from the permanent easement is treated as a charitable contribution. This charitable contribution is limited to 50% of the taxpayer’s annual income, with the excess being allowed as a carryforward to future tax returns for 15 years [IRC Sec. 170(h)].

Example

Ole and Lena own 300 feet of lakeshore on Ten Mile Lake. Their cabin occupies approximately 100 feet of lakeshore, but the remaining 200 feet of lakeshore consists of undeveloped frontage and woodland. Ole and Lena desire to create an arrangement where that 200 feet of undeveloped lakeshore is permanently restricted from any future development, both in order to preserve the privacy of their cabin property and to continue the preservation of the lakeshore and the conservation status of this property.

Ole and Lena enter into a conservation easement, working with the Ten Mile Lake Association and the Minnesota Land Trust, a qualified charity. This easement permanently restricts the 200 feet of undeveloped property from any future construction or development, assuring that it remains in its present condition in perpetuity. However, Ole and Lena continue to have full ownership and exclusive use of that property, as occurred previously.

To measure their charitable deduction, Ole and Lena secure two appraisals:  An appraisal of the 200 frontage feet of property and accompanying woodland as is (based on its development potential) and a second appraisal after placement of the easement restriction. Assume that the property appraises at $500,000 if capable of development, but only appraises at $300,000 of market value with the permanent easement that restricts any future development. These appraisals indicate that Ole and Lena’s conservation easement has diminished the market value of this parcel of land by $200,000. This $200,000 represents their allowable income tax charitable deduction.

Assume further that Ole and Lena’s annual Form 1040 adjusted gross income is $100,000. They are entitled to claim up to $50,000 (50% of adjusted gross income) of charitable income tax deduction annually from this easement. Accordingly, it will take them approximately four years to fully deduct the charitable contribution (4 years at $50,000 of charitable deduction per year = $200,000). Assuming that Ole and Lena are in a combined 30% federal and Minnesota tax bracket each year, the annual $50,000 charitable deduction from the conservation easement will save them $15,000 of federal and state income taxes per year. Over the entire four years of claiming the charitable deduction, they will save $60,000 in total taxes ($200,000 total charitable contribution x 30%). 

It is also possible that Ole and Lena may qualify for reduced real estate taxes to Cass County, because of the diminished value of their property.  Finally, if Ole and Lena are exposed to federal or state estate taxes, the reduced property value from the permanent easement will decrease those taxes.

For questions and further information, please contact any of the following members of the Ten Mile Lake Association Conservation Committee: