The following is an example of how the income tax benefits of a conservation easement donation work:

Dick and Jane Smith are considering buying a 210-acre ranch in Wyoming. After a year of searching, they finally locate the perfect ranch. The only problem is that the price that they have negotiated for the ranch is $12 million, and their budget is $10 million.

The ranch contains 210 acres and has an old ranch house and some outbuildings, but no other improvements. Under State and County regulations, the ranch can be divided into six 35-acre parcels. However, Dick and Jane have no interest in developing the ranch and simply want a place to retire and enjoy their children and grandchildren. Neither of them have any interest in dividing up the ranch; they simply want to keep the ranch as it is.

Dick and Jane want to build a new home on the ranch along with a guesthouse, corrals for their horses, a small barn and detached garage. Their realtor suggests to them that, given their substantial incomes and their interest in protecting the ranch, they consider donating a conservation easement on the ranch to a local land trust. A conservation easement is a private agreement, much like a set of restrictive covenants, between the landowner and the land trust (which is a public charity). The agreement restricts the development potential of the property in perpetuity and grants to the land trust the right (and responsibility) to enforce the terms of the agreement. The easement does not confer any right of access on the property to the public, and leaves ownership and control (consistent with the terms of the agreement) in the hands of the property owners.

Not only does the conservation easement help to preserve the ranch, it can generate significant income and estate tax savings. For example, if the easement reduces the value of the ranch from $12 million to $7 million (to be confirmed by a qualified appraiser), the easement is worth the difference of $5 million. The easement gift is a “charitable contribution” deductible against federal and (in many states) state income tax.

A new federal tax law allows this deduction to be taken up
The Fir Creek Ranch is one of the many beautiful and important Jackson Hole properties that have been preserved through the Conservation Buyer Program.
to 50% of the donors’ “contribution base” (essentially adjusted gross income) if the gift is made in 2006 or 2007. Any unused portion of the deduction can be carried forward for fifteen years after the gift, provided that the gift is made in 2006 or 2007.

A tax deduction of $5 million, given Dick and Jane’s income of $2.5 million annually, could save them over $2 million in state and federal income taxes.

For example, if Dick and Jane are residents of New York, their income will be subject to a top marginal rate of 6.85% state and 35% federal, or 41.85% combined. Assuming that their annual income is $2.5 million; they can realize a $2 million tax savings from the gift of an easement worth $5 million. They can deduct up to $1.25 million annually, which (taking into account the “phase-out” of itemized deductions for taxpayers earning more than $142,700) could generate an annual state and federal income tax savings of $500,000.

In four years the entire deduction will have been utilized and the net cost of the ranch effectively reduced from $12 million to $10 million. In addition, if Dick and Jane own the ranch at their deaths, their children may (depending upon the status of the estate tax code at the time) reap very substantial federal estate tax benefits for the easement donation.