Landowners who to want preserve their agricultural land and prevent future development can consider granting a conservation easement.
A conservation easement is the gifting of the development rights on a piece of land to a land trust, which is a private, nonprofit organization that works to conserve land. In doing so, the landowner not only ensures the land can never be commercially developed, even if sold, but also receives federal income tax deductions.
"Conservation easements on farmland are authorized by Indiana law," said Gerry Harrison, Purdue Extension agricultural economist. "The grantee, or charitable entity, has the responsibility under the law to see that the land is not developed for anything other than the landowner's retained purposes: agricultural production and perhaps a homestead."
In this type of voluntary agreement, the landowner retains land ownership, while the land trust makes sure that the terms of the conservation easement are followed. Landowners can reserve certain rights in the deed of the agreement, such as building a house or farm facilities – something Harrison said they should be careful to consider.
Landowners considering a conservation easement also should review a current tax amendment that allows greater-than-normal tax deductions.
"The gift of a conservation easement provides a federal income tax charitable deduction," Harrison said. "The allowable charitable deduction was expanded by an amendment to the Internal Revenue Code in 2006. That provision was temporary, but has been extended through 2013."
The temporary provision allows farmers or ranchers to deduct 100% of their contribution base (adjusted gross income computed without any net operating loss carryback to the taxable year) in a given year if at least 50% of their income is derived from farming.
For example, if a farmer had an adjusted gross income of $100,000 and gave a $90,000 conservation easement, plus $10,000 in other charitable contributions, he or she could deduct the entire $90,000 in the tax year of the donation, as well as the additional $10,000. With a higher value conservation easement, the taxpayer could carry over anything above $100,000 for a maximum of 15 years.
Farming and ranching corporations that donate conservation easements also can qualify for the 100% limit.
Here today, gone tomorrow
According to Harrison, ongoing government budget discussions mean the extension of the enhanced deduction for the gift of a conservation easement might or might not be available after 2013.
"Interested landowners would be wise to consult with an accountant or tax lawyer on how these rules might reduce their federal income tax liability and how future gifts or inheritance of the land with a conservation easement might reduce values for lifetime gifts and the federal estate tax," he said.
Even if the enhanced deduction provision is not extended beyond the end of the year, Harrison said, gifting a conservation easement still has tax benefits.
But the process of gifting development rights doesn't come without some initial costs.
For example, the landowner would be responsible for the cost of a professional appraisal to determine the fair market value minus the agricultural value of the parcel of land. The difference is the value of the conservation easement.
"Costs involved include the appraisal and the service fee paid to the entity that takes the easement," Harrison said. "These costs should be easily offset by the income tax savings from the charitable tax deduction of the value of the easement."
Harrison said landowners interested in pursuing a conservation easement agreement should consult a lawyer because the deed over development rights is a legal document.
More information about conservation easements is available in the following publications:
* Conservation Easements in Indiana (ID-231) by Harrison.
* Tax Treatment of Conservation Easements (ID-275) by Bill Hoover, Purdue University professor of natural resources and social science.
Both publications can be downloaded for free in Purdue Extension's The Education Store at www.the-education-store.com/ by searching their ID numbers.