The Role of the Tax Code
In re-working the tax code in the late 1970s, Congress added Section 170(h) allowing landowners to claim a tax deduction for the donation of conservation easements to a qualified land trust. A conservation easement is a voluntary, legally binding agreement that limits the future use, modification or development of land forever. The property under easement remains privately owned, and activities such as farming, ranching, and timber harvesting may continue under the terms of the conservation easement, so long as such activities are consistent with the easement’s conservation value.
After providing a temporary and enhanced federal tax benefit for conservation easements since 2006, Congress decided to make permanent the enhanced tax benefit under Section 170(h) in December of 2015. This bipartisan change in the law was meant to further encourage landowners to use this powerful incentive and drive greater private funding of conservation. Under the permanent enhancement, landowners can take a deduction for the value of the donated conservation easement and offset up to 50% of their adjusted gross income. Landowners may also carry forward the value of their deductions for up to 15 years. Farmers and ranchers who receive more than 50% of their gross income from agriculture can make a conservation easement donation and claim a deduction that offsets up to 100% of their adjusted gross income.
Because land is a valuable, appreciating asset, landowners are sometimes conflicted by their desire to preserve beloved property for the future and their need to tap the land’s financial worth today. For some wealthy landowners and families with large income-tax burdens, the Section 170(h) tax deduction may provide enough incentive to give up a property’s development rights forever and conserve it in perpetuity.
Other landowners with lower incomes and relatively low income-tax obligations may not be in a financial position to make the decision to conserve their land. In those cases, the landowners may feel their only option to raise needed cash is selling their land to a developer. However, there is another viable alternative for landowners who desire a stake in the outcome of their land, which is often the case for property that has been family-owned for generations. This other alternative is working with other sources of private capital where, consistent with established partnership tax law, private equity investors come together with the landowner in the form of a partnership and then, as a viable alternative to development of the property, consider making a conservation easement donation.