Tax-Sensitive Investing

 

7his month, we look at a very different (and increasingly more popular) tax-saving investment strategy: conservation easements.

Conservation easements can preserve open land and provide property owners with significant income, property and estate tax benefits. In the past, generally, only large landowners took advantage of conservation easements in part because an owner must demonstrate that granting an easement provides a benefit to the public. A public benefit included preserving a wildlife habitat or creating a buffer zone around already protected lands, for example.

Today, a public benefit could include simply preventing further strain on a public water supply. Greater development pressures and fewer larger parcels are reducing the scale of land conservation techniques. Easements on one-acre or two-acre parcels are no longer uncommon.

In general, the amount of the income tax deduction for a conservation easement reflects the value of the development rights that you gave up in granting the easement. The gift of a conservation easement is also a charitable contribution, which you can deduct from your income taxes. The amount of the deduction in one tax year may be limited to 30 percent of your adjusted gross income, but you can carry forward any excess deduction for up to five years.

Estate taxes are an important factor, too. More families that own land are finding that their property has become so valuable that they might be forced to sell some or all of it just to cover estate taxes when the family member who owns the property dies. Estate taxes now start at 37 percent for an estate worth more than $650,000.

A conservation easement reduces the value of property by giving up development rights. These

rights typically are given up in a deed to a nonprofit charitable organization. Their value is then deducted from the market value of the property for estate tax purposes. The difference can be enough for some families to reduce or avoid estate taxes altogether. Tax law changes enacted in 1997 give additional tax breaks to people who granted easements near metropolitan areas, national parks, wilderness areas and urban national forests.

Finally, in some cases, you also can reduce the size of your local property tax bill. This is more likely to be the case if you live in a jurisdiction in which the local tax assessors favor conservation.

Keep in mind that in granting a conservation easement, you will restrict the ability of your heirs and prospective buyers to use the land. For this reason, you should consult with an attorney who can carefully draft an easement that takes into account your wishes and the needs of your heirs. Although an easement reduces the value of your property, it does not necessarily make it more difficult to sell. In fact, proximity to protected land often enhances the value of nearby property.

The tax cut legislation passed by Congress in August (see the lead article in this issue of Small Business Tax News) would expand the availability of certain conservation easements by modifying distance requirements. The distance from which the land must be situated from a metropolitan area, national park or wilderness area would be increased from 25 to 50 miles and the distance from which the land must be situated from an Urban National Forest would increased from 10 to 25 miles. The legislation also clarifies that the date for determining easement compliance is the date on which the donation is made.

The president is also interested in promoting conservation easements. In his radio address this week (August 22), he talked about the Administration's $1 billion "Lands Legacy" program that would protect sites throughout the country through the use of conservation easements. The sites currently include 9,300 acres near Yellowstone National Park and nine sites near national forests and historic battlefields in Maryland and Virginia.