Tax Incentives for Conservation – Real and Imagined

Part 1 of 2
Originally Printed in the Register-Star

by Peter Paden
May 27, 2011

I just received word that a bill has been introduced in the House of Representatives in Washington D.C. that would significantly enhance federal income tax incentives for landowners of moderate financial means to conserve their property. These days it is not uncommon for people to own property that has increased in value far out of proportion to their overall financial resources. They may love their land and want to protect it with a conservation easement, which would permanently restrict its development potential. But the tax incentives have been structured in such a way that many property owners do not have enough annual income to realize a meaningful financial benefit. They have quite legitimately felt that they cannot afford to conserve their land. This bill would go a long way to correct that inequity and would provide a substantial boost to conservation.

Meanwhile, here at home it’s tax grievance season. At a time when government and other public treasuries are under acute stress, all of us who pay taxes quite naturally think about others in the community we may perceive as not carrying their weight. Among the ideas one often hears in this context is that conservation is a drag on the public fisc – that land under conservation easement is taken off the tax rolls, that the Columbia Land Conservancy doesn’t pay taxes on land we own and manage for public use and, more broadly, that the work we do comes at great cost to the community in lost economic activity and lost tax revenue. These notions reflect widespread misunderstanding.

It seems like a good time to remind everyone of the very real tax benefits associated with protecting land and to correct the record with regard to misperceptions that persist. In this column I will summarize the conservation tax incentives and the pending federal legislation to expand them. Next month, I will take on various myths and half-truths about the perceived cost to the community of conservation activities, and will argue that, in fact, conservation has a positive economic impact.

Real Conservation Tax Incentives

Federal Law

The primary financial incentive for private individuals to conserve land is rooted in the federal income tax code. When a landowner chooses to significantly restrict the development potential of his or her property by creating a conservation easement, the market value of the land will more often than not be reduced. The law treats the reduced value of the land as though it was a charitable contribution, and thus provides a tax deduction.

This incentive reflects a Congressional judgment that private acts of land conservation should be encouraged because they create significant public benefit. What public benefit? Congress specifically identified, among other things, the protection of natural habitats, the preservation of scenic open spaces, including farmland or forest land, and the preservation of land for outdoor recreation and education.

But it became apparent there is a problem with treating donated conservation easements under the normal charitable gift rules. The general rule is that you can’t deduct more than 1/3 of your income in any given year. And if you’ve given away more than that, you can only carry the deduction forward for five years. That works for most people for most charitable contributions, but the values associated with land transactions tend to be far greater than in other arenas. If you’ve reduced the value of your land by a six or seven digit number, you have to have quite a large annual income to realize the value of the “donation” over a six year period. This reality has given rise to the justifiable criticism that only people of considerable wealth can realize the financial benefit provided by Congress for conserving their land.

Under the proposed legislation, the Conservation Easement Incentive Act, H.R. 1964, people would be allowed to deduct up to 1/2 of their annual income and carry the deduction forward for fifteen additional years. Working farmers could deduct 100% of their income over the same, extended period. This change in the rules provides a simple and elegant solution to a vexing problem, levels the playing field for landowners of more moderate financial means who would like to protect their properties and will significantly step up the pace of conservation nationwide.

We know this because for the past six years, these expanded rules have been in effect under a series of temporary bills, the latest of which is set to expire on December 31, 2011. The results speak for themselves. Nationwide, in the first two years of expanded incentive provisions the amount of new conserved acreage jumped 36% over the preceding two year period, and the number of easements increased by some 50%. Here at CLC we have closed a number of easement transactions that in all likelihood would not have taken place under the historic rule. H.R. 1964 and its Senate counterpart, the Rural Heritage Conservation Extension Act, S.339, would make these expanded easement incentives permanent. Efforts to do that in prior years when the temporary provisions were set to expire have been sacrificed as pawns in a much more complex legislative chess game in which numerous provisions are in play.

The House bill enjoys remarkably broad bi-partisan support. Our own Representative, Chris Gibson, is one of 251 co-sponsors, almost half the entire House of Representatives! Senator Gillibrand is one of ten co-sponsors of the Senate bill. We have expressed our appreciation and would encourage you to do the same. While you’re at it, you might want to encourage Senator Schumer ([] or 202.224-6542) to sign on to S.339, as well.

Federal law also permits the estate of a deceased landowner to benefit financially from the donation of a conservation easement. Conserved land that is part of an estate will be valued subject to the conservation restrictions, and the same result may under certain conditions be achieved by a post mortem donation from the estate. Moreover, the law allows the additional exclusion of up to 40% of the otherwise taxable value of protected land up to maximum of $500,000.

State Law

Here in New York, there is a second important financial incentive to conserve land. Anyone who owns land that has been protected by a donated easement may receive a credit against their state income tax equal to 25% of the property tax bill up to $5,000 per year. That’s a dollar-for-dollar credit. They’ll send you a check if you don’t owe enough income tax to get the full benefit. Local government gets all the tax revenue. The State funds the conservation incentive. This benefit goes on from year to year, and applies whether or not the owner donated the easement or bought the property subject to it.

These are the primary financial benefits potentially available to property owners who choose to protect their land. Next month I will address a number of misconceptions that reflect fears and concerns that land conservation reduces the tax base and otherwise undercuts the economic health of the community, fears I am convinced are misplaced.

• Peter Paden is Executive Director of CLC. His column appears on the first Thursday/Friday of every month.