Tax Legislation Affecting Land Conservation: Michigan’s Pop-Up Tax Eliminated Plus New Incentives for Donated Conservation Easements
If you have ever thought about donating a conservation easement but put it off because you didn’t think you could take full advantage of the tax deduction…you should think about it again.
On August 17, 2006 the President signed into law new tax incentives for land conservation. The new law, by encouraging private conservation of important resource lands, enjoyed bi-partisan support. Congressman Dave Camp, who played an instrumental role in the Leelanau Conservancy’s efforts to preserve the Crystal River, stepped up again through his leadership on the House Taxation Committee to ensure that the conservation provisions were passed.
The changes apply to gifts of both fee-simple interest in land for conservation purposes and also conservation easement donations.
Under the “old” law, an individual could deduct the value of a conservation easement donation of up to 30% of the donor’s adjusted gross income (AGI) for the year, with a five-year carry forward of any unused amount. Also, under the old law, corporations that donated a conservation easement could deduct only up to 10% of the corporation’s taxable income for the year. These restrictions in effect made it virtually impossible for some conservation agreement donors to get the full value of an available deduction. This happened primarily when land was held in a corporation, or when the conservation easement had a high appraised value, but the donor had a relatively low income. In effect, individuals who might want to protect important family lands were sometimes penalized if they fell into the “land rich/cash poor” category.
Good news: under the new rules almost any potential conservation easement donor will find that their gift will be fully deductible. First, the “new rules” allow for the value of a conservation easement to be deducted up to 50% of an individual’s AGI for the year of the gift. Second, there is a 15-year carry forward (up from 5 years) of any unused deduction. Third, corporations are treated under the new rules the same as individuals. And finally, a “qualifying farmer or rancher” (individual or corporation) can deduct up to 100% of their AGI for a qualifying conservation agreement.
Matt Heiman, Director of Land Programs, says the new rules should prove beneficial to a wide array of potential conservation donors in Leelanau County. “Because of skyrocketing land values, many conservation easement donors found that they couldn’t deduct full value of a conservation gift within the required six-year period. There were some ways to deal with that problem: either break the entire donation into several phased gifts six years apart, or wait until a taxable event provides extra income and a need for a larger tax deduction. So the old rules often affected the size and timing of conservation gifts. Now if you want to protect your land, I think it will be pretty hard to find a donor who can’t take full advantage of the tax benefits.”
It is very important to note that any conservation gift still must protect significant conservation values, as defined in IRS regulations. That rule has not changed. Also, importantly, these new incentives apply to conservation gifts made in 2014 and 2015. If Congress fails to extend the incentives, they will sunset December 31, 2014. And most importantly, as always, it is important to get good individualized tax advice to know for sure how these additional incentives might apply to a particular situation.
“If you’ve been thinking of exploring a gift of a conservatease on land you own, there has never been a better time to contact us,” says Heiman. These new rules eliminate a lot of issues about structuring easements to take full advantage of deductions, and they virtually do away with timing issues.”
Pop-Up Tax Eliminated!
In early December, 2006, Governor Granholm signed Senate Bill #1004 that adds a huge new incentive to spur the donation of conservation easements in the state. The so-called “pop-up tax” kicks in when land is transferred within a family or is sold.At that time the Taxable Value of property becomes the same as the State Equalized Value. Sounds a bit arcane, but the Pop-Up Tax has children or new owners of conservation land paying as much as quadruple the taxes their parents or former owners did once the land is transferred to them.
That will change with the elimination of the Pop-Up Tax on land protected by conservation easement. Championed by Leelanau’s Senator Michelle McManus and Representative David Palsrock, the bill enjoyed overwhelming support in the legislature. Now, donors of conservation easements will be able to guarantee that their commitment to conservation in perpetuity will be rewarded by locking in the lower Taxable Value rate for those who take over stewarding the land after them.
These tax changes offer an unprecedented opportunity to conserve the Leelanau we cherish. Learn more: land protection specialists Matt Heiman, Tom Nelson and Brian Price are all available to talk with you: 231-256-9665.