HR- 4 PENSION PROTECTION ACT OF 2006 Update On New Federal Tax Law On Conservation Easement & Land Donation Tax Benefits

Size: px

Start display at page:

Download "HR- 4 PENSION PROTECTION ACT OF 2006 Update On New Federal Tax Law On Conservation Easement & Land Donation Tax Benefits"

Roderick Horton
7 years ago
Views:

1 HR- 4 PENSION PROTECTION ACT OF 2006 Update On New Federal Tax Law On Conservation Easement & Land Donation Tax Benefits

2 Nonprofit Municipality County Garden State P Preservation Trust Many agencies and levels of government bring their funds to bear to buy green parks and to preserve farmlands

3 Nonprofit Municipality County Garden State P Preservation Trust Who s Missing??!!!!

4 Nonprofit Municipality County Garden State P Preservation Trust Uncle Sam!!!

5 Nonprofit Municipality County Garden State P Preservation Trust The federal government provides a very small share of the costs of open space acquisition

6 HR4 HR- 4 might remedy this by increasing voluntary donations & so reducing purchase prices. If used, HR-4 becomes a form of federal subsidy to our land conservation efforts

7 Signed into law on August 17, 2006 Increases annual tax deduction for: donating an easement to conserve private land donating an easement to preserve private farmland from development donation of remainder value of land by owner who retains a life estate

8 Signed into law on August 17, 2006 Increases annual tax deduction for: selling an easement to conserve private land at a discount selling an easement to preserve private farmland at a discount discount sale of remainder value by owner who retains a life estate

9 Taxable Income EXAMPLE $100,000

10 Taxable Income EXAMPLE $100,000 Old tax deductions for conservation donations were limited to 30% a year, reducing taxable income to $70,000

11 Taxable Income EXAMPLE $70,000 Old tax deductions for conservation donations were limited to 30% a year, reducing taxable income to $70,000 Tax Deduction 30%

12 Taxable Income EXAMPLE $50,000 HR- 4 raises the limit on the tax deduction HR4 Tax Deduction 50%

13 HR4 Tax Deduction 100% EXAMPLE $ ZERO For qualified farmers, HR- 4 removes the annual deduction limit. The working farmer can deduct their entire income and pay NO TAX

14 HR4 Tax Deduction 100% EXAMPLE $ ZERO NOT A CREDIT!!!

15 $100,000 EXAMPLE $100,000 taxable income results in a tax bill of $33,000 33% Tax Bracket $33,000

16 TAX CREDIT $100,000 EXAMPLE $50,000 tax credit would wipe out the tax bill $50,000 $17,000 $33,000

17 TAX CREDIT $100,000 EXAMPLE...and leave a $17,000 credit balance to use next year $17,000 $33,000

18 TAX DEDUCTION $50,000 A $50,000 tax deduction cuts taxable income and so reduces the tax bill $100,000 $50,000 $33,000

19 TAX DEDUCTION $50,000 A $50,000 tax deduction cuts taxable income and so reduces the tax bill to $7,000 $50,000 $33,000 $7,000

20 TAX DEDUCTION $50,000. but it is not the same as a credit. The $50,000 tax deduction cuts the tax bill $26,000 $50,000 $33,000 $26,000 $7,000

21 Taxable Income EXAMPLE $5 million $3.5 million $2.5 million For affluent landowners, the value of the deduction should offset the payment they expect for their land HR4 Tax Deduction 50% Tax Deduction 30%

22 Signed into law on August 17, 2006 Increases annual tax deduction TRIPLES the life of the tax deduction Existing use of deduction: Base + 5 years New life of deduction: Base+15 years

23 $300,000 $180,000 $500,000 Old law allows household with $100,000 adjusted taxable income to deduct 30% each year for six years. $30,000 Old Tax Deduction 30%

24 HR4 $300,000 $500,000 With HR- 4 a household with $100,000 adjusted taxable income can deduct 50% each year. $50,000 HR- 4 Tax Deduction 50%

25 HR4 $500,000 $500,000 and they can use the deduction for 16 years to recognize the entire value of their $500,000 donation $50,000 HR- 4 Tax Deduction 50%

26 HR4 $800,000 $50,000 It could encourage landowners to make larger donations HR- 4 Tax Deduction 50%

27 What s this got to do with me? I m not taking a discount

28 What s this got to do with me? I m not taking a discount THAT S WHAT YOU THINK!

29 Possible forms of donation County bid-down process to improve ranking score for State funding State certification of value below the highest valid appraisal Span of time between appraisal date and closing date means value has changed

30 It s not that simple!!!

31 To claim a charitable tax deduction you must be able to establish Donative Intent to make a partial charitable gift, preferably at the start of the process

32 The Problems Deduction ends in Tax Year 2008 Does not apply to outright donations of land Does not apply to fee-simple bargain sales

33 The landowner who donates land outright does not qualify for HR- 4 deductions 6 YEARS 30% AGI

34 The landowner who donates an easement but keeps the land can qualify for HR-4 tax deductions 6 YEARS 30% AGI 16 YEARS 100% AGI

35 The Definition of a Farmer to qualify for the full 100% tax deduction More than 50% of income from the trade or business of farming Raising or harvesting agricultural or horticultural commodity Corporate farms get same treatment

36 The Definition of a Farmer Horses are not a commodity but IRS has said equine income counts Income from easement sale does not count as agricultural income Special grants such as Conservation Reserve Program may not count as farm income There is no definition for the permanent agricultural use of the land

37 If non-farm income for grants or for an easement payment exceed 50% of total income, landowner will not qualify as a farmer for the 100% tax deduction under HR-4 CRP Grants CRP Grants Agricultural Income Easement Sale Nonfarm Income

38 Installment Purchase Agreements could reduce the non-farm income by delaying most of the easement payments until after the base year, helping the farmer qualify for the 100% deduction under HR-4 Agricultural Income Easement Nonfarm Sale Income

39 The Definition of Agricultural Use Use must be permanent. Explicit language to explain it is absent It is assumed Farm & Ranchland Protection Program standards will apply... but we may not know until someone is audited

40 Legislation introduced to make HR-4 deductions permanent S. 469 IN THE UNITED STATES SENATE

41 Requirements for Qualified Appraisal Recognized under regulations from Interior Secretary Conducted in accordance with generally accepted standards National Uniform Standards of Professional Appraisal Practice (USPAP)

42 Requirements for Qualified Appraisal HR4 Test: An individual who has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth... by the Interior Secretary. HR4 Test II: Licensed or certified for the type of property being appraised. Appraisal Institute MAI designation

43 Definitions of a Fraudulent Appraisal Appraiser rigs value for a tax return Substantial valuation misstatement (Error of 150%) Gross valuation misstatement (Error of 200%) Appraiser was barred by IRS sometime in the past 3 years Non-MAI appraiser misstates comparable educational background

44 Penalty Fines to be Paid in Cash 125% of the fee collected or 10% of the tax underpayment

45 Other Issues with Qualified Appraisal

46 Garden State Preservation Trust Act 1999 CURRENT ZONING APPRAISAL PRIOR ZONING APPRAISAL Landowners benefited from the higher of the two appraisals. The intent was to protect them from any down-zoning or environmental rules that could seem connected with preservation efforts

47 HighIands Water Planning & Protection Act 2004 CURRENT ZONING APPRAISAL PRIOR ZONING APPRAISAL The GSPT Act prior-value appraisal system expired in The clock was reset and the policy was renewed statewide with the Highlands Act.

48 CURRENT ZONING APPRAISAL PRIOR ZONING APPRAISAL Don t rely on such appraisals to plan any tax deductions. The IRS will not recognize them.

49 Different kinds of appraisals Fair Market Value Appraisal Fair Market Value Appraisal with Easement Restriction ( after value) Special Value Appraisal Prior Zoning Value Appraisal Hypothetical Value Appraisal

50 But the IRS will not recognize these: Special Value Appraisal Prior Zoning Value Appraisal Hypothetical Value Appraisal

51 New IRS Form 8283 Agency must demonstrate resources to monitor and enforce easement Donor must provide baseline inspection, maps, photos Donor must identify selected conservation purpose Donor must report Fair Market Value and the FMV with easement ( before & after value) Donor must attach appraisal for easements valued at more than $500,000

52 New IRS Form 8283 Donor must stipulate if... donation was contingent part of a permit process donation was a requirement of a contract donor or a related person has any interest in other property nearby

The Private Landowner Center

The Private Landowner Center Estate Planning for Private Landowners By Robert Levite, Esq Extension Educator, Land Use & Natural Resources University of Massachusetts Extension The fact sheet is designed