A little more conservation
By Lauren Foster
Published: October 30 2007 05:03 | Last updated: October 30 2007 05:03 "Financial Times"
Marcia Smoker-O'Hern's 150-acre farm in Indiana's Whitewater Valley has been in the family for more than 100 years. Her father raised black angus cattle there and rotated crops of soybeans, corn and alfalfa. He also planted hundreds of fir trees and built an erosion-control dam. So when her brother proposed selling his share to developers, she balked at the idea and offered to buy his stake. Last year, Ms Smoker-O'Hern went a step further: she placed a "conservation easement" on 115 acres adjoining the Lick Creek Summit Nature Preserve and donated it to the Whitewater Valley Land Trust. The move allowed her to permanently protect the land from future development – and reduce her tax bill. "I think my father and mother would be jumping for joy," she says. "They would have loved to have known the land would be preserved."
While preserving the land honours her parents, she says it also ensures future generations will have an opportunity to experience the land as it is now. "It is important for my kids and their kids," she says. "Our family is conservation-minded."
Donating a conservation easement is a popular way to save open space and can yield income and estate tax savings for the seller. But it requires time and money, including appraisal, accounting and legal fees and other costs. In order to qualify as a tax-deductible donation, a conservation easement has to fulfil certain criteria: it must be perpetual, be held by a bona fide local township or non-profit conservation organisation, and serve a distinct conservation purpose.
"If you change your mind, or if the property becomes incredibly valuable as a development piece of land, you are kind of stuck," says Holly Isdale, head of wealth advisory at Lehman Brothers. As for the conservation purposes, Ms Isdale says the definition is fairly broad and can include the preservation of a natural habitat or open spaces close to an urbanised area that the public can enjoy.
The first step is to find the right non-profit organisation or government agency to give the easement. The Land Trust Alliance, a national organisation that represents more than 1,700 land trusts across the US, maintains a list of members (www.lta.org ). The property then has to be evaluated by the trust and examined by a qualified appraiser. As for the tax break, the value of the donation for income tax purposes is typically the difference between the land's full market value and the value of the land with the easement restrictions. An easement on the property can reduce its value – thus easing the size of the donor's taxable estate – and may result in lower property taxes. Dan Schrauth, a wealth adviser at JPMorgan Private Bank in San Francisco, says a conservation easement works best for people "who want to preserve the integrity of a piece of property they love and have an attachment to and get some great tax benefits at the same time". "It's a win-win situation," he adds.
The Pension Protection Act of 2006, enacted last August, extended the provisions on conservation easements through December 2007. Ms Isdale points out that while a permanent change to the rules was proposed in Congress and included in President George W. Bush's budget proposal earlier this year, the legislation has not been enacted. "As such, it is especially beneficial to donate a conservation easement this year," she says. The new rules allow donors to deduct up to 50 per cent of their adjusted gross income for easements made before 2008 – up from 30 per cent of AGI – and carry over any unused deduction for the following 15 years – instead of the five-year carry-forward under the old law.
For Ms Smoker-O'Hern, who had been contemplating a conservation easement for a several years, the new incentives tipped her hand. It was also good timing from a tax perspective because she had sold another property at a gain and would have faced a big bill. The more generous tax incentive has spurred a wave of donations. But tax advisers say the income tax deduction should not be the primary motivation – the landowner should be philanthropically inclined and concerned about conservation. "If you are in this primarily for the tax benefit it might not work that well, but if you're in it because you care about your land and want to keep it intact, it could work beautifully," says Stephen Small, a Boston-based tax lawyer specialising in land conservation. "A dollar of deduction is never worth as much as a dollar of cash. If you are in it purely for the financial side then you are better off selling."
Time is running out to take advantage of the extended tax benefits. Ms Isdale says donors could still get a conservation easement done this year, but only if they move quickly. "The two biggest challenges are getting the appraisal and finding the land trust that you are going to use." Moreover, conservation easements can be complex and so prospective donors should seek professional guidance. "Everyone's situation differs and so people should check with their tax advisers," Ms Isdale adds.
Mr Small, who has written three books on land ownership and tax and legal planning opportunities, says getting a conservation easement done by year-end depends on the complexity of the property. He warns: "Many land trusts are already at capacity for 2007 projects, and many professionals who work in this field are booked and cannot take on any more commitments for this year."
Copyright The Financial Times Limited 2007
