American Farmland Trust and other national conservation organizations heralded the recent signing by President Obama of the omnibus tax package and its provision to extend the enhanced conservation easement tax deduction for the 2010 and 2011 tax years. Originally included in the 2006 Pension Protection Act, the enhanced conservation easement tax deduction allows qualified farmers and ranchers* to deduct the value of a conservation easement contribution up to 100 percent of their Adjusted Gross Income (AGI) and expands the period landowners may carry-forward any unused value of a deduction up to 16 years. The legislation greatly increases the potential use of this option to protect our nation’s working agricultural lands.
Conservation easements have been used voluntarily by landowners to protect agricultural lands from development and fragmentation for close to 30 years. The donation or sale of conservation easements has enabled farm families to protect their land for future generations while receiving tax benefits or cash based on the land’s full market value. The donation of conservation easements by landowners has been influenced by IRS rules. However, until the 2006 Pension Protection Act established the enhanced conservation easement tax deduction, these rules provided minimal incentives for farmers and ranchers with a large percentage of their equity tied up in their land. The former IRS rules limited the carry-forward period over which a donor could claim a deduction to six years and capped the annual deduction at 30 percent of AGI.
A simple example can illustrate the power of the new rules in enticing full-time farm and ranch families to consider donating a conservation easement on their productive agricultural land or accepting less than the full purchase price when selling a conservation easement to a publicly funded Purchase of Agricultural Conservation Easement (PACE) program. Consider that a conservation easement donation valued at $450,000 and made in 2010 or 2011 by a qualified farmer with an annual AGI of $50,000 will yield the full value of the donation in federal income tax deductions in nine years (the value of the gift up to 100 percent of AGI each year for 16 years or until the gift value is used up: $50,000 X 9 = $450,000). Under the old rules, that same gift would have yielded only $90,000 in federal income tax deductions to the farmer (the value of the gift up to 30 percent of AGI each year for six years or until the gift value is used up: $15,000 X 6 = $90,000).
By creating an opportunity to deduct a large percentage, if not the full amount, of the value of a donated conservation easement, the expanded federal conservation tax deduction provides farmers and ranchers with a powerful business and estate planning tool. This new tax treatment also makes the bargain sale of a conservation easement in a PACE transaction worthy of much more serious consideration by agricultural land owners.
By increasing the likelihood that landowners will donate or accept a discounted price for conservation easements, the federal tax incentive provides tremendous leverage for public farm and ranch land protection funding, stretching those dollars at a time when budgets at all levels of government are stressed to the limit.
* Qualified farmers and ranchers are those who earn more than 50 percent of their gross income from the business of farming in the taxable year in which the conservation easement is donated. Land subject to the conservation easement must be available for agriculture.
About the author: One of the nation’s leading experts in Farmland Protection, Bob Wagner celebrated his 25th year at American Farmland Trust in 2010 and has worked in the field of farmland protection since 1981. In his current position, Wagner helps states and local communities nationwide build support for and create policies to protect agricultural land.