Presentation on theme: "Financial and Tax Implications of Land Exchanges and Conservation Easements Jeff S. Anderson CPA, CFP®, PFS CONTRYMAN Solutions Group."— Presentation transcript:
Financial and Tax Implications of Land Exchanges and Conservation Easements Jeff S. Anderson CPA, CFP®, PFS CONTRYMAN Solutions Group
Financial and Tax Implications of Land Exchanges and Conservation Easements Julie Moller, CPA CONTRYMAN Solutions Group
For additional information see presenter’s biography
Payment Programs Landowner is paid by a government agency or non-profit to take production-based land out of production. Temporary easements have time limits, for example, 5 years or 10 years; Landowner has no obligations after term of commitment. Permanent easements are perpetual. Payments based on formal appraisals from qualified appraisers or market analysis depending on the program and agency involved. In either case, you will need formal written appraisals from a qualified appraiser – these may differ from values in the market analysis. Generally there are costs incurred to physically restore the land back to its natural state. These costs will be paid either directly by the agency/non-profit or require land owner to incur the expense with reimbursement from the agency.
Gifting Programs Generally, the landowner does not get paid; instead makes a charitable gift by giving an easement that ensures the property will not be developed or used in any way contrary to a conservation purpose. Landowner gets a charitable deduction on income tax return equal to the fair market value (FMV) of the rights given up by entering into the easement.
Programs Offered through USDA/NRCS: Wetland Reserve Program (WRP) - Federal government buys the agricultural rights and restores the property to wetlands and grassland habitat. Grassland Reserve Program - Federal government buys an easement on grassland to prevent the grassland from being converted to other uses. Smaller program than WRP and more limited availability to landowners. Landowner retains rights to grazing and haying. Farm and Ranch Land Protection Program - Federal government partners with other organizations to protect farm or ranch land that is under threat from development. Land use does not change. It can continue to be farmed or grazed. Intent of the program is to prevent valuable farmland from being converted to development. The landowner is typically paid for this easement.
Programs through Non-Governmental Organizations: Conservation groups like DU and land preservation groups including local land trusts use a variety of tools to place conservation easements on properties, particularly properties that are prone to development. Typically, these types of easements do not change current land use. Typically, the easement preserves the land in its current use and prevents the land from being subdivided and converted to other uses. These types of easements are used to protect a variety of resources, including: wildlife habitat, historically or culturally significant areas, open space, “viewsheds,” water quality, etc. Many of these easements are entirely donated by the landowner while some include a payment to the landowner. It varies a great deal depending on the land trust involved, the landowner’s goals, availability of funding, and the resources involved.
Offered through U.S. Fish and Wildlife Service: Grassland/Wetland Conservation Easement - The FWS uses conservation easements to protect important wildlife habitats in places like the prairie pothole region, the Rainwater Basin, the grasslands in Kansas and many other places. In the prairie states, these easements typically prevent grassland from ever being plowed up, prevent wetlands from being drained, but allow grazing and certain amounts of haying. Landowners are almost always compensated for the easement through a payment made to the landowner.
Other Resources: In many states, state wildlife and natural resource agencies are involved in buying conservation easements from landowners to protect natural resources, including wildlife habitat, water, water quality, etc. State agencies in Nebraska are not very active in this arena. Natural Resource Districts - Here in Nebraska, some NRD’s are buying conservation easements from landowners. In most cases, the easements include the conversion of irrigated cropland to non-irrigated cropland or grasslands. Typically, these are situations where NRD’s need to reduce the total amount of irrigation occurring in a particular region because water is “over appropriated” and water use needs to be reduced to comply with DNR rules, endangered species issues, etc.
Notes: There are no hard and fast rules regarding compensation to landowners, but typically the government agency held easement involves a payment to the landowner while non-government held easements are often donated or partially donated. The government is hardly ever involved in a “gifting” situation. Non- profit land trusts, on the other hand, are often involved in gifting of land (or other property) and/or gifting of conservation easements. “Red tape” issues vary tremendously by easement type and easement holder. The Wetland Reserve Program easement involves a great deal of government control and oversight. Much paperwork is involved when a landowner wishes to implement some sort of action on the easement encumbered land. On the other end of the spectrum typically are the non-government held easements where little oversight and coordination is required. The FWS easements fall in between. From a property tax standpoint, the issues are similar. The county assessor should re-evaluate the assessed valuation of the property based on the rights given up by the landowner. But the easement holder is not involved in this process.
Payment Programs Payments received by landowners to take land out of production is considered a sale of land rights by the IRS. Cost basis must be determined and split between the value of the land before the easement and the value of the land after the easement. IRS will generally want appraisals to support the assignment of cost basis. Qualified appraisals establishing the FMV of the land before the transaction and after the transaction.
Payment Programs Gain will be determined based on the ratio of FMV assigned before and after the transaction. Generally, long-term capital gains rates will apply. Long-term capital gains are NOT necessarily a BAD THING at CURRENT RATES and with PROPER TAX PLANNING!
Like-Kind Exchanges Like-kind exchanges may work to defer income taxes. No cash can be received by seller in order to defer taxes. Cash must be assigned directly to the seller of replacement property. Any cash received is considered gain to the extent gain exists.
Deferred Like-Kind Exchanges (IRC Section 1031): Cannot receive any cash directly. Must use a qualified intermediary to hold cash. Cannot be a related party or interested party. Closing documents must state that the sale is intended to qualify as a deferred like-kind exchange. Seller has 45 days to identify replacement property, and Seller has 180 days in which to close on replacement property that was identified within the 45 day window.
Facts Market Analysis Value$280,000 Appraised Value Before Easement$320,000 Appraised Value After Easement$ 80,000 Cost Basis of Land$160,000 Example Sale Price$280,000 Cost Basis Assigned to Sale ($120,000) ($240,000/$320,000 x 160,000) Gain on Sale$160,000 Remaining Basis of Land$ 40,000 ($160,000 - $120,000) Note 1: In order to defer the gain, replacement must be purchased for at least $280,000. Note 2: If $20,000 is retained for equipment purchases and the remaining $260,000 is used to properly purchase like-kind replacement property, then $20,000 is subject to tax.
Restoring Land to Natural State For payments received from an agency/non-profit to reimburse the costs of restoring land to a natural state, the expense generally directly offsets the costs incurred for income tax purposes - but not always the case ! DU programs will pay most, if not all, of the excavation costs directly so landowner does not have to front money. NRCS programs like WRP will usually require landowner to contract for services at fixed prices and will then reimburse the landowner for costs incurred.
To Get an Income Tax Deduction: IRS Form 8283 must be completed, and A qualified appraisal valuing the land before and after the gift must be attached to the income tax return, and The IRS Form 8283 must be signed by the qualified appraiser, The signed Charitable Easement documents must also be attached to the income tax return. Can deduct up to 50% of Adjusted Gross Income (AGI) annually and carry over unused amounts either indefinitely or up to 15 years (different than standard 5 year limitation).
Facts Market Analysis Value$280,000 Appraised Value Before Easement$320,000 Appraised Value After Easement$ 80,000 Cost Basis of Land$160,000 Gift Value$240,000 ($320,000 - $80,000) Example Adjusted Gross Income (AGI)$125,000 Charitable Deduction - Limited ($ 62,500) ($125,000 x 50%) Carry-over Charitable Deduction to Future Years $177,500 ($240,000 - $62,500) Note 1: The charitable deduction is limited to 50% of AGI.
Conservation easement are complicated and have very specific rules that apply to them. Not all appraisers, Certified Public Accountants (CPA's), nor attorneys have experience with these transactions. Generally, the dollars involved are substantial and the tax implications are significant. Find a qualified appraiser, CPA, and attorney with work experience and good references to work with and expect to pay some fees to get it done right. You will likely get more value back than the extra cost of hiring the right professionals.