There are potential tax advantages at both the state and federal level for permanently protecting your land.
Michigan Public Act 446 of 2006
What Does Public Act 446 Do?
Under current Michigan law, the taxable value of a parcel of property may not increase from one year to the next by more than 5% or the increase in the consumer price index, whichever is lower, until there is a transfer of ownership. When the property is sold or transferred, the assessment is “uncapped” and the parcel is taxed upon its state equalized value (SEV: 50% of its true cash value). This reassessment upon transfer creates a “pop-up” property tax. P.A. 446, introduced as Senate Bill 1004, eliminates the “pop-up” property tax on the transfer of lands enrolled in a voluntary conservation agreement (also known as “conservation easement”).
How Does This Benefit Conservation?
Until the signing of Senate Bill 1004 on December 7, 2006, property taxes on conservation lands, like developed lands, jumped dramatically upon their sale or transfer. Property taxes on conservation lands rose significantly even though their development is permanently limited. This provided a disincentive for landowners to enter into conservation agreements. To afford the higher taxes, new landowners needed the option of developing the land. The elimination of the pop-up tax on conservation lands means that both current and future landowners have a strong incentive to keep the affected lands intact with habitat, environmental and scenic benefits. This law gives protected conservation property the same tax treatment as protected farmland.
How Does This Benefit Private Landowners?
The Act prevents the taxable value of conservation property from “popping-up” to the state equalized value when it is transferred. This means a potential direct tax savings of hundreds or thousands of dollars per year for new owners of the land.
What’s an Example of How the New Law Works?
An 80-acre non-farm property with a current taxable value of $43,000 and a state equalized value of $252,000 would have been subject to $4,395 in annual property tax payments after transfer. Under the new law, if the 80 acres are all enrolled in a conservation agreement, annual property taxes will remain at their current level after transfer — $750 per year. This means an annual savings of $3,645. Over a 50-year span, the new landowner will realize an estimated $149,131 in value from the change.*
* Residences and buildings on the lands are still subject to reassessment to the current SEV.
Federal Tax Incentive May Help You Conserve Your Land
If you own land with important natural or historic resources, donating a voluntary conservation agreement can be one of the smartest ways to conserve the land you love, while maintaining your private property rights and possibly realizing significant federal tax benefits.
A taxpayer who donates land, an easement or other personal or real property to a public charity or government agency may generally deduct its full fair market value. Deductions for donations of “capital gain property” are usually limited to 30 percent of the donor’s adjusted gross income in any given year, with the remaining value carried forward for up to five additional years.
What do you need to know to enter into a voluntary conservation agreement?
- A voluntary conservation agreement, also known as a conservation easement, is a legal agreement between a landowner and a nonprofit land trust, like the Chippewa Watershed Conservancy, or a government agency that permanently limits uses of the land in order to protect important conservation values. It allows you to continue to own and use your land and to sell it or pass it on to heirs.
- When you enter into a voluntary conservation agreement with a land trust, you give up some of the rights associated with the land. For example, you might give up the right to subdivide your land or build additional houses, while retaining the full right to grow crops. Future owners also will be bound by the agreement’s terms. The land trust is responsible for making sure the terms of the agreement are followed.
- Voluntary conservation agreements vary widely. For example, an agreement to protect rare wildlife habitat might prohibit any development there, while one to protect the scenic and historic values of a farm might allow continued farming and the building of additional agricultural structures. An agreement may apply to just a portion of the property, and need not require public access.
- A conservation donation requires not only a willing donor, but a qualified conservation organization to accept the donation. That organization needs to be able to show that the donation closely fits its particular charitable mission. A land trust will not accept a donation that does not fit its mission and purposes.
- The Chippewa Watershed Conservancy is a fully qualified conservation organization in compliance with all requirements of the Internal Revenue Service and the State of Michigan.
- A voluntary conservation agreement can help a landowner pass land on intact to the next generation. By limiting the land’s development potential, the agreement lowers its market value, which in turn lowers estate tax and property taxes.Whether the agreement is donated during life or by will, it can make a critical difference in the heirs’ ability to keep the land intact.
- If a conservation agreement benefits the public by permanently protecting important conservation resources and meets other federal tax code requirements, it can qualify as a tax-deductible charitable donation. The amount of the donation is the difference between the land’s appraised value with the agreement and its value without the agreement.
- To qualify as a charitable donation, a conservation agreement must be permanent and meet other specific requirements. See Internal Revenue Code, Section 170(h) for more information. A landowner should get professional financial planning and legal advice before making such a major donation.