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Reducing Federal Estate Tax

Death triggers the possibility of a federal estate tax on the assets owned by the deceased person as of the date of death (called the "estate"). A conservation easement on the person’s land can reduce the tax owed.

Reduction in Value of Estate

When land subject to a conservation easement is valued for federal estate tax purposes, the restrictions on subdivision, construction of improvements, and activities and uses imposed by the conservation easement are taken into consideration.  Thus the conservation easement can result in significant savings in the tax that must be paid by the estate, especially if the land is the primary asset of the estate.

Deduction for Charitable Contribution

If the deceased landowner failed to grant a conservation easement while alive, the persons handling the estate (called "personal representatives") can take advantage of a tax benefit by donating a conservation easement on property of the estate before the filing of the estate tax return.  If the conservation easement otherwise qualifies as a charitable contribution under Code §170(h), the appraised value of the conservation easement can be claimed as a charitable deduction for estate tax purposes under the authority of Code §2055(f).   In general, the appraised value of the charitable contribution will be calculated as the difference between the value of the property before restriction less the value of the property as restricted.

Exclusion from Value of Estate

If property included in an estate is restricted by a conservation easement that qualifies as a charitable contribution under Code §170(h), up to 40% of the value of the eased property may be excluded from the value of the estate for purposes of estate tax.  This exclusion, subject to certain qualifying factors set forth in Code §2031(c), applies whether the conservation easement was granted during the deceased owner's lifetime or after death.  The exact percent reduction depends on the extent to which the conservation easement reduces the value of the property.  Maximum available exclusion from estate tax is $500,000. 

Weighing the Options

The personal representatives administering the estate must weigh the benefit of the partial exclusion under Code §2031(c) against the detriment that the  excluded property will not get the advantage of a stepped up basis for tax purposes.  In other words, when the property is eventually sold, the then-owner will pay tax based upon the gain realized over the deceased owner's investment in the property -- not fair value as of the date of death.

Disclaimer

Nothing contained in this or any other document available at ConserveLand.org or ConservationTools.org is intended to be relied upon as legal advice. The authors disclaim any attorney-client relationship with anyone to whom this document is furnished. Nothing contained in this document is intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to any person any transaction or matter addressed in this document.

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Experts

Western Pennsylvania Conservancy (WPC)
412-586-2333
Over 5 years experience coordinating and conducting all aspects of real estate transactions including land protection projects.
Pregmon Law Offices
610-834-7411
Pregmon authored the guide "Reducing Federal Estate Tax." She has helped scores of clients achieve their goals.
Curran Realty Advisors- Appraisers LLC
215-493-5000
Qualified Appraiser under IRS regulations for appraisal of non-cash charitable contributions.

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Acknowledgements

Patricia L. Pregmon, attorney at law, was the original author of this document.

 

Disclaimer

Nothing contained in this or any other document available at ConservationTools.org is intended to be relied upon as legal advice. The authors disclaim any attorney-client relationship with anyone to whom this document is furnished. Nothing contained in this document is intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to any person any transaction or matter addressed in this document.
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