This example (not intended to be tax or legal advice) is based on information provided by Central Virginia Land Conservancy, 1824 Clayton Avenue, Lynchburg, VA 24503, (434) 384.3785, clcv@yahoo.com. Please consult with your legal and financial advisors about your particular situation. If you would like a list of area attorneys familiar with conservation easements, please contact smstevick@earthlink.net.
Rich and Betty own 150 acres of farmland in Bedford. Their land is valued at $300,000. Rich is a 3rd generation farmer. He and Betty would like the peace of mind of knowing their land will always be protected from development. Their 2003 income was $65,000.
| Value of land before easement | $ 300,000 |
| Value of land after easement | $ 150.000 |
| Value of easement | $ 150.000 |
| Adjusted gross income | $ 65,000 |
| Federal income tax bracket | 25% |
| State income tax bracket | 5.75% |
| Federal Income Tax Deduction | |
| Value of easement (max total allowable deduction) | $ 150.000 |
| Annual limit on deduction | 30% |
| Maximum annual deduction (30% x income) | $ 19,500 |
| Number of years deduction allowed | 6 |
| Total allowed deduction (over 6 years) | $ 117,000 |
| Total Federal Income Tax Savings (over 6 years) | $ 29,250 |
| (deduction x tax rate) | |
| Case I. Use State Tax Credit to Offset State Taxes | |
| Max total allowable credit (50% of easement value) | $ 75,000 |
| Annual credit limit | $ 100,000 |
| State income tax due without easement | $ 3,737 |
| Pre-credit state income tax with easement* | $ 2,616 |
| Yearly tax credit available with easement | $ 2,616 |
| Number of years credit allowed | 6 |
| Total State Income Tax savings (over 6 years) | $ 15,696 |
| Total Federal & State Income Tax Savings | $ 44,946 |
| Case II. Sell State Tax Credits | |
| Max. total allowable credit (50% of easement value) | $ 75,000 |
| Sell tax credits @ $.80 per dollar of credit in lst year | $ 60,000 |
| State income tax paid over 6 years | $ 15,696 |
| Total State Tax Benefit | $ 44,304 |
| (State tax credit income – state income tax paid) | |
| Total Federal Tax Savings & State Tax Benefit | $ 73,554 |
*Because the easement donation is tax deductible in determining state income tax (as well as federal income tax), after the easement is donated, Rich and Betty’s state income tax liability would drop from approximately $3,737 to $2,616.
For additional information
Visit BCLP’s Resource Cart at the Central Branch of the Bedford Public Library in Bedford where you will find the publication: A Simplified Guide to the Tax Benefits of Donating a Conservation Easement by C. Timothy Lindstrom, 2001.
