The information in this publication is provided only for educational purposes and to inform the reader of relevant topics. This is not to be perceived or utilized as formal tax or legal advice. It is up to the reader to seek the necessary and appropriate tax and legal professionals that specialize in these areas for specific guidance.
Conservation easements, the purchase of development rights (PDR), and similar transactions have garnered a great deal of attention over the last decade by farmers and landowners. Not only because of the potential to save farmland, timber stands, and open spaces but also because of available federal tax benefits. The tax benefits have been so positive for farmers and some landowners that some individuals have begun nefarious schemes in an attempt to abuse the federal tax benefit. So much so that the U.S. Department of Treasury’s Internal Revenue Service (IRS) has put out information to let the public know that they are not only scrutinizing conservation easement syndicates but are prosecuting the syndicates and have even developed an opportunity for them to step forward for a possible settlement.1 It is important that when selling or donating a conservation easement or PDR, IRS tax code and regulation is followed. Please use a tax professional experienced with these types of transactions to provide you with guidance to help navigate the complicated rules which apply.
The following is a summary that can be used to guide some of your decisions about whether to enter into the purchase and or donation of an easement. However, each situation is unique and should be evaluated on the individual facts and circumstances with appropriate professional counsel. The general rules for conservation easements can be found in I.R.C. § 170(h).2
It is important to understand that a number of variables come into play that will determine the tax implication to the property owner(s). The following is not to be an exhaustive list, but are some of the most common relevant facts which will determine the tax implication:
1. How long has the property been owned?
2. Is the easement being donated, sold, or a combination?
3. What is the adjusted tax basis of the property at the time of entering into the conservation easement?
• It is also important to understand that there may be a new adjusted basis in the property following the sale and or donation of the property.
4. Is the landowner a “qualified” farmer or rancher as defined by I.R.C. § 170(b)(1)(E)(vi)?
• A qualified farmer is a taxpayer that at least 50% or more of the taxpayer’s gross income is derived from farming or ranching activities, as defined in I.R.C. § 2032A(e)(5).
5. Due to a change that occurred in 2006, is the property being donated (and or sold) for a conservation easement subject to a restriction that the property remains available for agriculture or livestock production?
If the conservation easement is sold to a qualifying organization and the amount received is less than the adjusted basis of the property, there may not be a tax liability created by the sale, and the tax basis of the property will be decreased by the amount of the payment received (IRS Rev. Rul. 77-414, 1977-2 CB 299). But if the payment received is above the adjusted tax basis in the property, then the tax basis decreases to $0 on the remaining property interests held by the landowner, and the excess amount will be considered a gain. If the property has been held for more than a year, long-term capital gains tax will be owed on the excess amount. See the example below:
Phyllis and Nick Dorn own a small crop farm. They have owned the property for fifty years and have now received income from the sale of a conservation easement.
- The adjusted tax basis in the property is $250,000
- They received a payment of $600,000 through the sale of the conservation easement.
- The tax basis on the affected property becomes $0
- The excess amount ($600,000 – $250,000) of $350,000 is subject to long-term capital gains tax since the property has been held for more than a year and used in the trade or business of farming.
If the landowner contributes/donates the property for the purposes of a conservation easement to a qualified organization, the landowner may be eligible for an itemized tax deduction(s) subject to some limitations (I.R.C. §170(f)(3)(B)(iii)).
If the contributor of the property is a qualified farmer (I.R.C. § 170(b)(1)(E)(vi)), then the contributor may deduct the value of the contribution up to 100% of what is typically the taxpayers Adjusted Gross Income (AGI). The value of the contribution above the 100% of AGI can be carried forward for up to fifteen years. If the contributor is not a qualified farmer or rancher, then the 100% of gross income rule is limited to generally 50% or 30%, dependent on to whom the contribution was made.
If the easement/PDR is donated (or a portion thereof), then there may be some specific tax benefits that are allowed. How the tax benefit plays out will be dependent on whether or not you are the owner of the property or are an owner that is also a “qualified” farmer or rancher, according to the IRS definition.
The state of South Carolina also offers a Qualified Conservation Contribution Credit. Landowners who contribute a “qualifying gift of land or real property” for conservation purposes to qualifying organizations may receive a credit amount of up to 25% of the contributed value with a limitation of $250 per acre donated; the credit cannot exceed $52,500 per tax year. The credit can be carried forward, and it can also be transferred to another taxpayer through gift or sale. A taxpayer should use the SC SCG.TC-19 form to claim the credit.3
A valuable tool for South Carolina landowners considering the use of conservation easements is the South Carolina Conservation Credit Exchange (www.conservesc.com/contact.htm). The Exchange allows for the sale and purchase of South Carolina Qualified Conservation Contribution Credits. South Carolina is one of five states to allow this. It is strongly encouraged that a taxpayer work with a trusted tax professional to determine if the carrying forward or the sale of the credit is more advantageous.
References Cited
- Internal Revenue Service. IRS provides details about settlements in syndicated conservation easement transaction initiative. Washington (DC): Internal Revenue Service; 2020 Oct 1. https://www.irs.gov/newsroom/irs-provides-details-about-settlements-in-syndicated-conservation-easement-transaction-initiative.
- Internal Revenue Service. Guidance regarding deductions by individuals for qualified conservation contributions. Internal Revenue Bulletin: Notice 2007-25. https://www.irs.gov/irb/2007-25_IRB#NOT-2007-50.
- Tax Credits. Qualified conservation contribution credit and form TC-19. Columbia (SC): South Carolina Department of Revenue; 2021. https://dor.sc.gov/about/forms.
Additional Resources
Steele J. Protecting Working Forests with Conservation Easements. Clemson (SC): Clemson Cooperative Extension, Land-Grant Press by Clemson Extension; 2021 Feb. LGP 1106. http://lgpress.clemson.edu/publication/protecting-working-forests-with-conservation-easements/.
