Land Conservation Easements
A Land Conservation Easement is a land preservation agreement between a landowner and a qualified land protection organization in which the landowner donates "qualified" land under Internal Revenue Code 170(h) and exchange may receive a federal income tax deduction in the amount equal to value of their donation. The tax deduction is determined by determining the current value of the land and subtracting that number from the value of the land at its "highest and best" use. These numbers are determine by thorough examination by a qualified appraiser.
Someone owns 1000 acres of land and decides that in order to keep the land in its current state they will take out a Conservation Easement on the property and in exchange, could receive a federal income tax deduction. They will have a qualified appraiser complete a "before and after" appraisal.
After examination, the appraiser determines that the "before" or current value of the land is $1 million. He also determines that the "highest and best use" of this land is as a residential community and that the "after" value of this land is $5 million. So the difference be the two values is $4 million, this is also the federal income tax deduction that the federal government will allow.
This brings up another important question. How much can one deduct from his income? As of December 2015, a person may deduct up to 50% of their income using this strategy. So, in the example above, in order for that landowner to fully use that deduction of $4 million, he or she would to earn at least $8 million.
However, a landowner could partner with a land preservation specialist to create a partnership that will allow individuals with substantial income to partake in that deduction the same way the landowner would. Based on that example above, that individual's federal income tax deduction would be 4 times the about his investment ($1 million current value/$4 million deduction). So if they were to invest $100,000 into a partnership that determines that the Conservation Option is what is best for the land, then their federal income tax deduction would be $400,000. One would then multiply that deduction, $400,000 in this example, by their tax bracket to determine their tax savings.
Let's assume the highest federal tax bracket of 40% (39.6% rounded). This would mean that the investor in this example could save $160,000 of their federal tax bill, but they only invested $100,000. This a strategy that is only available to "accredited investors" that is a great way, when done correctly and conservatively, to use that tax code to your advantage. It is important that one consult their tax adviser when considering this option.