There are many reasons you may want to preserve your land. Perhaps it has been in your family for generations. Maybe it’s the beauty of the land, the promise of your farmland, or your appreciation that your land has high quality natural areas or wetlands that provide habitat for wildlife or plant species. You may want to protect your land from development and at the same time, lower your tax burden.
Whatever the reason, Conserve Lake County can help you and your family understand the many options available for land preservation.
A conservation easement is a legal agreement between a landowner and a conservation organization that permanently limits certain uses of a property in order to protect its conservation values. Easements allow you to continue to own and use your land, and to sell it or pass it on to heirs. Easements can qualify as tax-deductible charitable donations, and significant income, estate and property tax benefits are common.
When you create a conservation easement, you choose to give up some—but not all—ownership rights. For instance, an easement on property with rare wildlife habitat might forbid any development outside of trails and boardwalks, but one on a farm might allow crops and construction of an additional barn or even a homesite. All future owners are bound by an easement's terms. An easement may apply to just a portion of your property, and typically does not require public access.
Perhaps most important, conservation easements on highly valuable land can be essential for passing land on to heirs. By removing the land's development potential, the market value is lowered, significantly lowering the estate tax—which can be as high as 35% of the land's value. In many cases, a second sizable deduction can be applied as well. These savings can make the critical difference in your heirs' ability to keep the land.
Dedication as an Illinois Nature Preserve
If your land is of high ecological value, it may be of special interest to the Illinois Nature Preserves Commission, established by the state to protect high quality lands. Dedication of your land as an Illinois Nature Preserve or Land and Water Reserve has many benefits similar to a conservation easement. The land is protected and monitored in perpetuity, and various tax benefits can accrue due to this type of charitable contribution. In addition, land which is dedicated as Illinois Nature Preserves has its assessed value set at $1 per acre, per year, essentially eliminating all the land's real estate taxes. The land can still be privately owned, but within the management and protection standards established by its dedication.
Donation of Land
Though not for everybody, donating your land to a conservation organization is the simplest way to protect it into perpetuity—even if you continue to live on the site. Not only do you provide long-term protection to the land, you may also receive income, property and estate tax benefits.
Outright Donation - In an outright donation, you donate full ownership of the land while you are still living. This offers maximum tax advantages, because you may take a charitable gift deduction based on the full fair market value of your land as determined by a qualified appraiser. This charitable gift deduction can significantly reduce your income taxes. You would no longer pay property taxes on the donated land, and estate taxes (if they apply) for this land would be eliminated.
You can donate your land but not give it up immediately. In this case, two options are available: donation by will, or donation with reserved life estate.
Donation by Will - By leaving your land to a land conservation organization in your will, you retain full use and control over your land while you are alive, and ensure its protection after you are gone. You do not receive an income tax deduction or property tax relief. However, your estate taxes (if they would have existed) are eliminated.
Donation with reserved life estate - With this option, you donate your land to a conservation organization and retain use of all or part of the land during your lifetime, or even the lifetime of immediate family members. The value of your donation for tax purposes is based on the fair market value of the property, less the estimated value of your life interest in the property, according to IRS guidelines. The tax advantages are less than with an outright donation, but greater than with a donation by will.
Residential and commercial properties can also be donated to a land conservation organization, with the understanding they will be sold to support the organization’s work.
Sale of Land
Selling your property to a conservation organization or agency such as the Lake County Forest Preserve District has its advantages. You might wish for the land to be enjoyed by the public, or you might find that a conservation organization is better able to manage or protect it, or taxes may have risen too high for you to continue to own or protect it. Conservation organizations have access to funds for purchasing property with special features, such as natural, scenic or recreational qualities. In considering a sale, you have the option of selling at fair market value, at a bargain sale, or in installments.
Sale at Fair Market Value - For this option, you would receive full market price of your land as determined by a qualified appraisal. If your land is sold for its full value, and it has appreciated since you originally purchased it, you may be liable for income tax on the capital gain. This may significantly affect your net profit from the sale.
Bargain Sale - In a bargain sale, you would sell your land to a conservation organization at less than full market value. The difference between the selling price and the fair market appraised value is considered a donation. You are then eligible for a charitable income tax deduction equal to the difference between the full price and the bargain price.
Installment Sale - You can also sell a portion of your land with an option to sell the remainder in successive years thereafter. You would be spreading the income from the sale over several years, thereby helping to reduce your capital gains tax. If you use installments combined with a bargain sale you may be able to increase the amount of income tax deduction.
Sale with a Reserved Life Estate - You may sell your land to a conservation organization and retain the right of lifetime tenancy for you and/or your immediate family. Any income tax savings would depend on whether the sale is at fair market value, at bargain sale or in installments.