Charity can literally begin at home—or at other real estate that a client may own. Donating a conservation easement to a recognized environmental agency can provide tax as well as psychic rewards. With conservation easements, "landowners permanently restrict the future uses of their land in order to preserve its character and protect it from development," says Paul Brown, a partner in the St. Paul, Minn., law firm of Chandler & Brown.
For example, one of Brown's clients wanted to preserve a large tract near Lake Superior, where the client and his family hunt and allow some logging. "The landowner granted an easement to the West Wisconsin Land Trust that permits those uses, but prohibits subdivision and residential development," says Brown.
Such grants can count as charitable contributions, generating tax benefits. The value of the donation is based on before-and-after appraisals that quantify the easement's reduction of the land's value. If a property was originally worth $1.8 million, but is worth $1.3 million after the easement grant, the amount of the charitable contribution is the $500,000 difference.
TRIPLE (OR QUADRUPLE) PLAY
Thus, an easement donation can produce multiple tax benefits. "Conservation easements may reduce or even eliminate estate taxes," says Brown. "The value of the easement is effectively removed from the owner's estate. In addition, some local zoning and land use laws take easement values into account, which may result in lower property taxes."
Income tax benefits also can be substantial. "Among my clients is a wealthy family who live on a large farm," says Chris McLean, principal and client strategist in the Charlottesville, Va., office of family wealth advisor Signature. "One of their children lives in another home on the property, and my clients also lease some of the land for farming."
The owners wanted to protect the farmland, McLean notes, and they also anticipated some large capital gains from portfolio restructuring. "They donated an easement to the Virginia Outdoors Foundation," he says, "restricting development on the property in perpetuity, so those restrictions will apply to any future owners. They retained the right to build a mother-in-law cottage there, and to build some barns."
The family still lives on the property, as before, and retains the right to sell it. "There's no right of public access," McLean points out. "That's a common misperception. Granting an easement does not have to mean permitting the public onto the property."
Without the development rights, the property lost value, and the reported income tax loss was enough to offset the taxable gains incurred from portfolio sales. "Besides the federal tax deduction," says McLean, "my clients also received state income tax credits from Virginia. They can't use them all, but Virginia law permits them to sell tax credits to taxpayers who can use them. The current demand for those credits is so strong that my clients may receive more than 90 cents on the dollar."
Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.