Tax Deduction Potential Increases the Value of Your Investment
A tax deduction is allowed as a charitable donation of the rights to subdivide the land. The land is then protected from being subdivided. This is usually called a conservation easement.
A
conservation easement, known also as a conservation restriction, is used to protect the natural resources and beauty of a piece of property. It is a legal agreement where a landowner assigns certain rights associated with the development of the land to a qualified organization, such as a land trust or governmental group, to permanently limit the use of the land, such as from being subdivided into smaller parcels. Usually, the value of the easement is considered as a donation, which is what allows it to be used as an income tax deduction from both federal and state taxes.
The landowner still continues to own the land, use the land, sell the land, or pass it on to heirs. It also does not mean that it must be open to public access.
Qualifying for Federal Tax Deduction StatusThe donation must protect important conservation resources and meet other federal tax code requirements. You have the ability to design the term and protective devices desirable, which are then submitted to an appraiser of your choice, who then defines the value of your gift to charity. The donation is determined by an appraiser based upon the value of the property before and after the donation. The fact that the Tres Lomitas Ranches property is surrounded by lands already designated by the Bureau of Land Management as a Wilderness Study Area, and is also directly adjacent to the state parks of Rockhound and Spring Canyon lays a foundation defining the property as a valuable conservation resource. We have an agreement with a local 501(c)(3) charity to accept the donation or you can seek out an agreement with a charity of your choice.
Income Tax CreditsOn a state level, New Mexico state law allows up to a $250,000 tax credit, which may be applied over the next 20 years. It can also be sold to someone else, as in the case if you are not a resident of New Mexico.
Deductions for federal taxes are also available. You can choose the tax benefits for your own situation or reserve a portion for a later sale to a future buyer who may use the deduction.
Obviously, there is a lot of detail in these scenarios and we suggest a review of the materials posted to the
New Mexico Land Conservancy, and consulting with your own tax advisor.
Assigning a Donation ValueThe amount of the donation is based on the difference between the land's value with the easement and its value without the easement. If you make a donation of all or a portion of your 40-acre tract, stipulating that it cannot be subdivided, then the government recognizes the value of the donation as the difference in value, such as if the land were to be subdivided to the density of a town.
- Note lots in the town of Deming currently sell for $25,000 per lot, with 10 lots per acre.
- One-acre lots, 45 miles away in the Las Cruces Talvera neighborhood, on the flanks of Organ Mountains and adjacent to the Dripping Springs Bureau of Land Management National Recreation Area, are offered beginning at $60,000 per acre.
The donation value is determined by an independent appraisal. We are interested in offering a broad network of appraisal resources experienced in land trusts and will continue to post more appraisal contacts as they become available.
- We have an experienced appraiser with a proven track record consistent with the example above who is available for consultation.
- The Land Trust Alliance maintains a database of appraisers.
Hypothetical Example of the Valuation of Conservation Easements
An unrestricted 40-acre parcel costing $5,000/acre for a total investment of $200,000 is set up so it could be subdivided into 10 lots per acre so each lot could be sold for $25,000/lot or $250,000/acre or 1 million for 40 acres. Instead of actually selling the lots for $25,000 each, a conservation easement is donated to a charity of one’s choice for a potential deduction of $250,000/acre on the parcel costing $5,000/acre, less a deductible cost of development. That is, the deduction is based on what the property is worth before the development.
The public is served as the beauty of the mountain continues to be a jewel in the area, the investor is served by doing a public service of preserving the value of this beautiful land and gets a tax deduction based on an appraisal, and also maintains the pristine value of the land, which now can’t be subdivided. The key to this approach is getting an appraiser to give an appraisal to this effect and setting the property up to allow such public donations of land that would be otherwise developed into 10 home sites per acre.
Safe Harbor Provision
Currently, electric utilities are available to all the properties, cable utilities are available to all the properties, water is available to all the properties, sewer systems are arranged including green concepts and roads to each lot will be available, i.e. most functions of a city that can then allow subdivisions or the county allowing such subdivisions. The risks to such approach are:
- A change in the federal or state tax laws.
- A refusal of the county commission to allow such subdivision based on changes in the law.
- Regulation changes restricting appraisals to prevent such a plan.
ResourcesWe encourage you to review the materials below about the concept and speak with a tax advisor before making any decisions.
Publications
Organizations