Conservation based estate planning can help you and your family save on taxes! Below are taxes that may affect you as a landowner as you move forward with deciding the future of your land and tax incentives that can help you reduce your taxes. To learn more about these tax incentives, contact your local land trust.
Remember that the laws that determine these taxes can change. With the exception of the estate tax, the descriptions below do not represent the law in any particular year, but instead are a simple explanation of the taxes that may be involved when land is transferred between people or generations of a family. For information on how these taxes impact your specific situation, contact a tax specialist with conservation experience.
Federal and State Estate Taxes
This is a tax on your estate if its value exceeds a certain threshold. One opportunity to lower the value of your estate is through land conservation tools. Federal and state tax thresholds often change from year to year.
2016 Estate Tax Exemption Limits
An estate is the total of all of your asset, including your land.
Federal: In 2016, the federal estate tax exemption limit is $5,450,000. Estates below this amount will not owe federal estate taxes. Estates above this amount will be taxed at a rate of 35%.
State: In 2016, the Massachusetts tax exemption limit will be $1,000,000. Estates below this amount will not owe Massachusetts estate taxes. Estates above this amount will pay a progressive tax that maxes out at 16%.
These are federal taxes incurred on gifts given while you are living. You can give a certain amount per year without triggering this tax. Giving under the taxable limit can be a useful way of transferring ownership or interest in land slowly while avoiding taxes. If you give more than the limit annually, the excess is applied toward your lifetime gift-tax exclusion. If at any point the gifts you gave during your life, or left in your estate, exceed that exclusion, the donor generally pays gift tax on the excess amounts. Gifts of any amount transferred between spouses are allowed tax-free.
Capital Gains Taxes
These are taxes assessed on the sale of capital assets, including land. This tax is applied to the value that your land and other assets have appreciated over time. For example, if you bought your land for $50,000 and it is now worth $200,000, the capital gains tax is applied to the increase in your land’s value of $150,000. Placing a conservation restriction on your land is one effective way to lower its sale price and therefore the capital gain from the sale of your property. However, the sale of a conservation restriction or a bargain sale can also trigger capital gains liability.
For a story about how one family was able to minimize taxes by balancing income from land conservation with a charitable gift of a conservation restriction, see the Rose family story.
Federal Income Taxes
As land values and assessments increase and municipal budgets decrease, local property tax burdens can be difficult for families to meet. Conservation restrictions and the Massachusetts Chapter 61 current use tax programs provide opportunities to reduce property taxes on your land.
State Income Tax Credit for Land Conservation
If you donate a conservation restriction or land, or if you sell a conservation restriction or land at below fair market value (bargain sale), you can apply for a Massachusetts Income Tax Credit, which:
- Is limited to 50% of the donated value as determined by qualified independent appraiser, and is capped at $75,000.
- Applies to your state tax liability during the year of the donation. If your tax credit is larger than your tax liability, the state will issue a check for the remainder of the approved credit. For example, if you qualify for a $75,000 state tax credit, and your state income tax is $5,000, then the amount you owe in state income taxes will be $0, and you will be issued a check for the remaining $70,000.
- Does not apply to all land conservation transactions. The land must have certain natural resource values as determined by the state.
- Can be utilized in addition to claiming the federal income tax deduction described below.
Federal Income Tax Benefit for Land Conservation
Congress has renewed the enhanced tax deduction for conservation restriction donations through December 31, 2013.
This is a powerful tool for allowing modest-income donors to receive greater credit for donating a valuable conservation restriction on their property, but it's only good for project completed in 2012 and 2013. Efforts are underway to extend the federal tax benefit for land conservation. Talk to your local land trust about the status of this benefit.
Specifically, the enhanced incentive:
- Raises the deduction a donor of a conservation restriction can take against their federal taxes from a cap of 30 percent of his or her income in any year to a cap of 50 percent;
- If 50% of the value of the donation is not taken in the first year, incentive allows landowners to extend the carry-forward period for a donor to take the balance of their tax deduction for donating a conservation restriction from 5 to 15 years to give landowners more of an opportunity to reach their full deduction; and
- Allows qualifying farmers to deduct up to 100 percent of their income.