2006 Federal Tax Code Changes:

New Federal Law Expands Income Tax Benefit for Voluntary Conservation Agreements

For a short time, you can take advantage of great new incentives to preserve the land you love.

Generous landowners who donate conservation easements to the Upper Valley Land Trust are inspired by many things: they love the Upper Valley region, they feel deeply connected to their land, and they wish to leave a legacy of open space for future Upper Valley residents. This inspiration is at the heart of UVLT’s work to permanently protect our region’s rural character and its important natural resources. But donating a conservation easement is a major financial decision, and for many landowners the federal income tax deduction that comes with a donation helps make it possible.

The Pension Protection Act of 2006 includes, among other provisions, important new tax incentives for donations of land conservation easements. These changes are effective only until December 31, 2007. This new law presents a limited-time opportunity for landowners to obtain an increased tax benefit for making the charitable donation of a conservation easement.

Among the changes, the new law:

1. Raises the deduction a landowner can take for donating a conservation easement from 30% of their adjusted gross income in any year to 50%;

2. Allows qualifying farmers, ranchers, and owners of working forestland to deduct up to 100% of their taxable income if the majority of that income came form farming, ranching, or forestry (e.g., pay no federal income tax); and

3. Extends the carry-forward period for a donor to take tax deductions for a conservation easement from 5 to 15 years.

The new incentive also applies to bargain sales of conservation easements that qualify under Internal Revenue Code (IRC) 170(h). It does not apply to donations of land in fee.

Congress also passed tighter appraisal standards for such gifts, and stronger penalties for appraisers who violate the standards.

How does it work?

Before the rule change, not all landowners were able to take full advantage of federal tax incentives for land conservation. The new rules expand these benefits to more moderate income landowners. The Land Trust Alliance provides the following hypothetical example:

Mr. Brown owns 50 acres of land with environmental conservation value that he wants to protect forever. Mr. Brown's annual taxable income is $100,000. He wants to donate his property's development rights to a land trust through a conservation easement. The donation is valued at $700,000.

Under the Old Law
Mr. Brown is only allowed to deduct 30% of his taxable income and only has 6 years total to use up the deduction:
Total value of the gift = $700,000
Mr. Brown’s annual tax deduction = $30,000 (30% of his $100,000 taxable income)
Eligible time period = 6 years (year of the gift + 5-year carry-forward)
Tax deduction claimed = $180,000 ($30,000/year x 6 years).
Tax deduction lost = $520,000 ($700,000 value - $180,000 deduction)

Under the New Law
Mr. Brown is allowed to deduct 50% of his taxable income and has 16 years to use up the deduction:
Total value of gift = $700,000
Mr. Brown’s annual tax deduction = $50,000 (50% of his $100,000 taxable income)
Eligible time period = 16 years (year of the gift + 15-year carry-forward)
Tax deduction claimed = $700,000 ($50,000/year over first 14 years).
Tax deduction lost = $0 ($700,000 value - $700,000 deduction)

And it could get even better … If Mr. Brown is a family farmer, rancher, or tree farmer and wanted to preserve his farm, ranch, or forestland, his deduction could increase from 50% to 100% of his annual taxable income.

Who qualifies as a farmer, rancher, or tree farmer?

The new law defines a farmer or rancher as someone who receives more than 50% of their income from “the trade or business of farming”. The law references an estate tax provision (Internal Revenue Code (IRC) 2032A(e)(5)) to define activities that count as farming. Specifically, those activities include:

• cultivating the soil or raising or harvesting any agricultural or horticultural commodity (including the raising, shearing, feeding, caring for, training, and management of animals) on a farm;

• handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of the commodity so treated; and

• the planting, cultivating, caring for, or cutting of trees, or the preparation (other than milling) of trees for market.

The qualified farmer or rancher provision also applies to farmers who are organized as C corporations. For an easement to qualify for the special treatment, it must contain a restriction requiring that the land remain “available for agriculture”.

For more information see U.S. Treasury Regulations on Donations of Conservation Easements , or contact Peg Merrens, UVLT's Vice President for Conservation.
As always, UVLT recommends that landowners considering a conservation easemet donation consult a financial advisor.