Last updated March 2021:
The donation of a conservation easement can be valued by a qualified real estate appraiser for income tax purposes and the landowner may be eligible for certain state and federal tax benefits. The value of the easement, as determined by the appraiser, equals the difference between the fair market value of the property before and after the easement takes effect. As with all charitable gifts, it is the responsibility of the donor to choose their own appraiser and substantiate the value of their gift with the IRS and the Virginia Department of Taxation.
In Virginia counties where use value taxation is in place, land subject to a conservation easement is usually entitled to taxation at use value rates. However, all houses, farm buildings or other structures will still be taxed at their fair market value.
PEC provided the following summary of the tax benefits of conservation easements for informational purposes only. Please consult your attorney and/or accountant for professional advice on the implications of an easement donation for your own tax situation.
In Virginia, landowners who donate a conservation easement may be eligible for a Land Preservation Tax Credit (LPTC) equal to 40% of the value of their donation. These tax credits can be used to directly pay the landowner’s Virginia income tax liability, and as a result, each $1 of credit is actually worth $1 to the landowner.
- Each individual taxpayer can use no more than $20,000 in LPTCs per year.
- Unused LPTCs may be carried forward for an additional 10 years (up to 11 years in total).
- Virginia caps the statewide total amount of LPTCs issued to landowners in any one calendar year at $75 million.
- Landowners may also choose to transfer or sell their LPTCs to other Virginia taxpayers, an incentive that may be particularly beneficial to those that do not have the income to use all the credits themselves.
For example: A landowner who donates an easement worth $500,000 would receive $200,000 in land preservation tax credits (40% of $500,000). The landowner could use those credits to offset their own Virginia income (up to the $20,000 per year individual annual cap) and sell the rest to other Virginia taxpayers.
Credits can be traded among private parties or through an attorney, accountant, or tax credit broker. After paying Virginia Department of Taxation fees and other transaction costs, landowners typically net about 80 cents on the dollar when they sell their credits.
Conservation easement donors also may be eligible for a federal income tax deduction. This deduction would be equal to the value of their easement donation, minus the value of any state income tax credits, such as the LPTC, received in exchange for the donation.
The landowner can claim that deduction at the rate of 50% of their federal Adjusted Gross Income (AGI) per year. Any remaining deduction may be carried forward an additional 15 years (up to 16 years in total).
Further, landowners who are farmers earning more than 50% of their income from agriculture in the year they donate the conservation easement may deduct the donation at the rate of 100% of AGI every year the deduction is available.
For example: A landowner who donates an easement worth $500,000 and receives $200,000 in Virginia LPTCs, could be eligible for a $300,000 federal tax deduction to be used at the 50% rate (or 100% rate for farmers) and carried forward up to 15 years as described above.
Very few American have estate taxes due upon their death. In the rare circumstances where the value of the estate is exceptional, the estate tax rate is 40% of the total assets over the current IRS-determined exclusion amount. In such circumstances, donating an easement may help reduce this estate tax burden by:
- Reducing The Value of Estate – The overall estate value will be reduced by the value of the donated conservation easement. As a result, estate taxes will be lower, because heirs will not pay taxes on the development rights surrendered with the easement. In other words, heirs will only pay estate taxes on preserved farmland values, rather than on full development values.
- Allowing an Exclusion – In addition to the reduced land value described above, federal law also allows the easement donor and their heirs to exclude up to 40% of the post-easement value of land from the taxable estate. This exclusion is capped at $500,000.
Some counties use Virginia’s Land Use Assessment Program for determining property taxes. In these counties, land that is protected with a conservation easement may be taxed based on its “use value,” which could result in a lower property tax bill than if the property were taxed at its “market value.”
Counties that do not use Land Use Assessment, simply tax land under conservation easement at its reduced value under the easement.
PLEASE NOTE: The explanation of complex tax and land planning issues provided in this fact sheet has been greatly simplified. For more detailed information and to ensure that a conservation easement donation will qualify for the described tax deductions in your particular situation, you are encouraged to seek professional legal and tax advice. Piedmont Environmental Council staff cannot assure the deductibility of an easement donation or the applicability of the benefits described.