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| February 7, 2007 |
Dow Jones WebReprint Service®
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Tax Break With a View
By RACHEL EMMA SILVERMAN
Muscoe R.H. Garnett Jr.'s farm in Loretto, Va., hasn't changed much
since the family acquired it in the 1600s. Now, the retired insurance
executive has made sure it will stay that way.
Encouraged by recent tax legislation, Mr. Garnett has placed a
"conservation easement" on much of his property, located about 80 miles
from Washington, D.C. The move permanently shields the rolling pastures,
timber forests and croplands from being turned into a housing
subdivision or business park. Under the easement, which is a binding
agreement typically made with a land trust, the Garnett family still
owns the land and can continue to use it for farming and timber but most
of it can never be developed.
Landowners who place conservation easements on their scenic,
environmentally sensitive or historic properties have long been able to
get tax breaks from the federal government, and some states have also
begun offering tax incentives. Now, a little-noticed provision in the
wide-ranging pension law Congress passed last summer has made the
federal tax breaks even more generous. Conservation groups say this has
spurred a sharp increase in the number of landowners interested in
placing easements on their property.
"The incentives are fantastic, and I don't think a lot of people
realize it," Mr. Garnett says.
But the expanded federal incentives, backed by some influential
lawmakers from agricultural states, are due to expire at the end of this
year, unless Congress acts to extend them. (A bill recently introduced
in the Senate would make the changes permanent, and President Bush also
called for them to be made permanent in this week's budget proposal.)
For now, landowners might need to act quickly, since conservation
easements can take several months to put together.
Here's how it works: A landowner typically donates a conservation
easement to a land trust, a type of non-profit organization that helps
put together the easement and monitors its restrictions over time. The
value of the donation for income-tax purposes generally is the
difference between the land's unrestricted value and its new value with
limited development or usage rights.
Be careful, though. The Internal Revenue Service and Congress in
recent years have been concerned with easement abuses in which donors
have taken inflated deductions or placed restrictions on land with
little conservation value, such as golf courses. The new law includes
stiffer rules and penalties regarding appraisals, to prevent donors from
overstating the deduction for their land. The IRS says it is currently
auditing hundreds of easements.
But the law is designed to encourage easement donations by allowing
larger tax deductions. Landowners can now deduct the value of a donation
up to 50% of their adjusted gross income per year, up from the previous
ceiling of 30%. That means if your adjusted gross income is $100,000,
you are now eligible for as much as a $50,000 tax deduction a year,
instead of $30,000. And if your income is too low to deduct the full
amount of your gift in one year, you can now carry forward the deduction
for 15 additional years, up from five years previously.
Property held in family limited partnerships, limited liability
companies and some types of corporations may also be able to take
advantage of the increased deduction limits, says Stephen J. Small, a
Boston tax lawyer who specializes in conservation easements.
The law is even more generous for career farmers and ranchers who
earn at least half their income from their land. These property owners,
who are often land-rich, but cash-poor, can now deduct up to 100% of
their income. "If you're a farmer you could pay no federal income taxes
for 16 years," says Rand Wentworth, president of the Land Trust
Alliance, a coalition of 1,600 land trusts across the country.
Colorado rancher Jay Fetcher in recent years placed conservation
easements on two large parcels of his 2,000-acre cattle ranch near ski
resort Steamboat Springs. The first donation, on 1,350 acres, was worth
about $1.1 million for tax purposes. But Mr. Fetcher, limited at the
time to deducting a small portion of his income, was able to take only
about $60,000 of that donation in deductions over six years. "We left
almost all of the donation on the table," he says.
Mr. Fetcher is planning this year to make another easement donation
on 270 acres to a Colorado land trust. He expects the value of the
donation will be about $1.2 million, and thinks he will be able to
recoup roughly half that amount because of the higher federal tax
deductions and an increase in state tax credits. "The changes helped
us," says Mr. Fetcher. Still, he says the financial incentives are
secondary to his desire to preserve the land, in his family since 1949,
with its sweeping views of mountains and pine forest. "Our family has no
desire to ever see the ranch developed. That's at the beginning of it
all," says Mr. Fetcher.
The tax-rule change has generated sharply increased interest in
conservation easements, say land trust officials from Washington and
Wyoming to Georgia. "Some landowners whom we've been talking to for five
or almost 10 years say that now it makes economic sense for them," says
Laurie Wayburn, president of the Pacific Forest Trust in San Francisco.
Conservation easements can generate other tax benefits, too. They can
cut estate taxes, because the land is considered to be worth less under
an easement. A growing number of states offer a range of income tax
breaks. Colorado and Virginia, for example, give donors state income tax
credits that are transferable, which means that landowners who don't
need the tax credits can sell the credits to other taxpayers for instant
cash. You may even get a property tax break, depending on where you
live.
Conservation easements can vary. A farm owner, for instance, could
still retain the right to farm the land and to build a couple additional
homes or barns, but could limit the land from being further subdivided.
Property owners can sell their land, but buyers are obligated to honor
the easement.
Peter Bance recently placed a conservation easement on 65 acres of
the Virginia farmland that has been in his family since 1840. The
property was zoned to allow construction of six housing sites, and he
donated the rights to five of those sites to a state-run land trust. (He
kept one site in case a descendant wanted to build a house in the
future.) "We think we have a piece of heaven and we hope to keep it that
way for generations to come," says Mr. Bance, 55, who is an executive
with Wachovia Corp.
If you're thinking of doing a conservation easement, it's best to
contact a land trust in your area to find out if your property
qualifies. (Try
www.lta.org, the Web site of the Land Trust Alliance.) There's no
minimum size, but in order to get a tax deduction the property has to
meet certain criteria, such as having significant environmental, scenic
or historic value. Also, be sure to work with a tax and legal adviser
familiar with local applicable laws.
The land has to be appraised (try
www.appraisers.org, the Web site of the American Society of
Appraisers) and may need to be surveyed, which can cost a few thousand
dollars. There are also legal fees to draw up the easement, which can
cost several thousand dollars, depending on the complexity of the deal.
Some land trusts also recommend landowners make cash donations to the
land trust to help fund the organization's future monitoring of the
easement.
Because easements are placed in perpetuity, a family has to be sure
it wants to permanently restrict development — and the potential for a
big windfall — before committing.
Several months ago, after discussions with his wife, children and
grandchildren, Eslick Daniel placed a conservation easement on his
200-acre farm in Columbia, Tenn., near Nashville. The easement on the
farm, called "Sweet Easy," limits development, except for a couple of
building sites that Dr. Daniel's descendants could use for housing. For
Dr. Daniel, 65 years old and a retired orthopedic surgeon, the tax
incentives weren't a factor. "We wanted to keep it where it would be
open land for our family and for other people," he says.
Jay Fetcher
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Jay Fetcher has placed
conservation easements on two large parcels of the
2,000-acre cattle ranch in Clark, Colo.—shown here—that
his family has owned since 1949. Thanks to wide-ranging pension
legislation passed last August, landowners, like Fetcher, who
place conservation easements on their scenic,
environmentally-sensitive or historic properties can get more
generous tax breaks. |
Ray Ilg, Colorado Cattlemen's Agriculture Land Trust
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This year, Mr. Fetcher expects
to place a third easement on 270 acres of the ranch
and donate the development rights to the Colorado Cattlemen's
Agricultural Land Trust. By doing so, Mr. Fetcher can
take advantage of the new federal tax incentives as
well as a Colorado tax credit of up to $375,000. |
Joshua Eli Cogan/Getty Images for
The Wall Street Journal
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Peter Bance, a
farmer and rancher —and Wachovia executive—in rural Virginia. He
recently placed a conservation easement on 65 acres of
the Loretto, Va., farm that has been in the family
since 1840. "We think we have a piece of heaven and we hope to
keep it that way for generations to come," says Mr. Bance. |
Emily Parish
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Several months ago, Dr.
Eslick Daniel, placed a conservation easement on his 200-acre
farm, called "Sweet Easy," in Columbia, Tenn., near
Nashville. The easement on the property limits
development, except for a couple of building sites. Pictured
here is Sweet Easy's Leiper's Creek.
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Emily Parish
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The Water Valley
Overlook at Sweet Easy in Columbia, Tenn. For Dr.
Daniel, 65, a retired orthopedic surgeon, the tax incentives
weren't a factor in his donation decision. "We wanted to keep it
where it would be open land for our family and for other
people," he says. |
The Pacific Forest Trust
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The Turner Creek ranch
is located in Sierra County, Calif. and sits within commuting
distance of Truckee and Reno, NV. "I grew up here, raised my
family on this ranch and have felt the increasing development
pressures on the Sierras," says Russell Turner, who is
pictured here on his 725-acre ranch with Laurie Wayburn,
president of the Pacific Forest Trust in San Francisco.
The trust is working towards purchasing a forest conservation
easement from Turner. |
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