Big Tax Breaks For No Cash

You might be eligible for one of the sweetest tax breaks in the law. The break can net you tens of thousands of dollars in tax breaks without your having to shell out any cash beyond some lawyer’s and appraiser’s fees. Some experts call it the tax break for giving away air.

The tax break is known as a conservation easement. It is available to anyone whose property has conservation, scenic, or historic value. Initially, only individuals who owned thousands of acres of land or famous historic buildings used this break. But a much wider group of taxpayers are eligible for it. Here’s how it works.

An easement is a legal right to your property that you give to someone else. For example, utility companies have an easement to lay lines on your property and enter your property to inspect and maintain them. A conservation easement gives someone else the right to limit development on your property to prevent the loss of its scenic, conservation, or historic value.

Suppose own a large rural property. You can give an easement to a conservation group that will prevent you or a future owner from turning the property into a resort, subdivision, or industrial site. Since the easement permanently restricts future development, the value of the property declines. You get to deduct this lost value on your income tax return as a charitable contribution. You can deduct of up to 30% of your adjusted gross income each year and take up to six years to use up the contribution. The more development rights you give up, the bigger your tax deduction.

What if your contribution couldn’t be used within six years? Then you can write the easement so that it is phased in over a period of years, stretching your ability to take deductions to 12, 18, or even 24 years.

A conservation easement accomplishes two goals. First, it gets you a big tax deduction. Second, it ensures that a property will be preserved by future generations the way you want.

You have to meet a number of qualifications to get these benefits. Don’t try it without a lawyer who is familiar with conservation easement requirements. Here are a few tips:

• Coordinate the conservation easement with the rest of your estate plan. Remember that you are reducing the value of the property to your heirs and limiting their options regarding the property.

• The easement will make it more difficult to sell the property. Don’t do an easement if you or your heirs ever might need to sell the property for cash in a hurry.

• The easement must be given to a qualified conservation organization or a government agency. The Nature Conservancy, National Trust for Historic Preservation, and Ducks Unlimited are examples of qualified organizations. Private foundations are not eligible.

• The development rights given up must be specified in the easement document. You have a great deal of flexibility and can draft the easement to meet your desired use of the land as well as your tax needs.

• Your property must have historic or conservation value. The easement can preserve an historic structure (battlefield, historic residence or commercial building) or a significant habitat, protect a view, or create an area to be used for public outdoor recreation or education.

• A qualified appraiser must value the loss in the property’s value. The appraiser must have experience in your region. This is perhaps the most important part of the strategy.

The size of your property doesn’t matter. What matters is that the appraiser can determine that you are giving up something of value and that it qualifies for the conservation easement tax break. In the right area, giving up additional development rights on half an acre can be valuable. You also don’t have to grant an easement over an entire property. If you own a few thousand acres, you can put an easement on only part of it.

A conservation easement is worth considering for anyone who is property-rich and either cash poor or in a high tax bracket. If you ever looked at your property and thought, “It would be a shame if anyone ever…,” consider granting a conservation easement and get paid for enforcing your wishes.