FEDweek

Tax Savings on Land Conversion

If you own land, donating a conservation easement can produce a substantial income tax deduction. You also will reduce the property’s value for estate tax purposes.

Suppose Bill Wilson bought several acres of land in a semi-rural area, years ago. He built a house on the land, for family vacations. Bill’s property has been appraised at $800,000.

One possible strategy would be for Bill to donate a conservation easement to a local government or preservation group. This easement puts some restriction on future development, such as limiting residential development to a certain number of homes, with minimum lot sizes.

An unrelated, qualified appraiser might state that Bill’s property is now worth only $500,000, because the development rights have been reduced. This loss of value produces a $300,000 income tax deduction, as a charitable donation. In addition, there will be less exposure to estate tax.

This strategy works best if you hope to keep the property in your family, for future generations. There will be legal and appraisal fees involved, which may partially offset the tax savings, so you should have a genuine desire to maintain open spaces.