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You can grant a nonprofit organization stewardship over your land for a tax break.
Real estate land trusts give property owners anonymity when purchasing land
Conservation land trusts preserve land for future generations
Private landowners can convey some of their property to a land trust, which is a nonprofit organization, and receive tax benefits
There are two main types of land trusts, which are very different. A real estate land trust is simply a trust that is meant to hold one type of asset, real estate land, and provide privacy to the property owner. Like other types of trust, the real estate land trust offers privacy and asset protection. The purpose of a conservation land trust, on the other hand, is to protect land and open spaces from development. Nonprofit organizations, as well as the government, work to preserve public lands and conserve natural resources and landscapes for future generations. Someone can elect to give the development rights of their property to a land trust in return for tax benefits.
If you plan to buy private land, then one of these trusts may work as part of a well-crafted estate plan. We’ll discuss how each type of land trust works and the benefits.
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A trust is a legal entity that holds assets for another person’s benefit. A real estate land trust is designed to hold the property title or deed to a tract of undeveloped land. Since the trust owns the land, it allows someone to purchase land with less of a paper trail. The real estate land trust originated in Illinois when landowners wanted to bypass a law that forbid people who owned land to vote on future projects scheduled for the city.
Let’s say you want to build a new housing development in the city but you are a well-known figure in your community. You could open a real estate land trust to buy the land and erect towering buildings without scrutiny from the neighboring residents. Real estate transactions are typically searchable by the public, but the real estate land trust would protect your identity.
This type of trust can also benefit you if you are embarking on a real estate project with other people. If one of your partners is sued, the real estate land trust would preserve the assets from creditors since the trust is a separate entity apart from the people, including your financially unreliable partner, who opened it.
A land trust is usually revocable, meaning it can be modified or revoked. You may think that a real estate land trust sounds rather similar to a living trust, which is just a trust that is established while you’re alive. The difference between a land trust and a living trust is that the former is only meant to hold real estate land and property.
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This type of land trust is not a trust the way it’s defined through estate planning terms. A conservation land trust is actually a nonprofit organization that manages and preserves land or property. This includes forests, wetlands, farms, and natural habitats, as well as areas that hold water sources, cultural landmarks, or even scenic views.
Land trusts can buy tracts of land outright or steward land that was directly donated. More commonly though, private landowners can grant the land trust a conservation easement. A conservation easement allows someone to maintain ownership over their private land while contracting the land trust to provide stewardship over that land.
If you own land, you can grant a conservation easement to a qualified land trust, or even the government, which will oversee and preserve the landscape. You can work out the terms of the agreement and conservation priorities. For example, you might allow sustainable farming practices and forbid buildings and structures within certain distances of rivers. The land trust that holds the conservation easement is responsible for making sure you and other entities, including those who may own the land in the future, make appropriate use of the land.
Placing a conservation easement on the land does not mean you are making it available for public use, but you can. Some landowners might give public access to the wildlife habitat sanctuary or nature trails on their property. Conservation easements last forever. If you sell or bequeath your property, the agreement still remains in place.
You can receive federal income tax deductions and state income tax credits for donating a qualified land property to a land conservancy. Consult with a professional like a tax advisor for more information and learn more about how to file your taxes here.
When you grant a conservation easement to a land trust, the tax benefits don’t stop there — they continue even after you die by minimizing the estate tax. If you've placed a conservation easement on your property, you can naturally deduct the value of that land from the overall property and thus your total estate.
In addition to that, your estate can exclude an additional 40% of the total land value (up to a maximum $500,000) from their estate.
As an example, let’s say you have a $10 million property and conveyed $2 million worth of land to a land trust. For the purposes of the estate tax return, this property would be worth $8 million ($10 million - $2 million). Next, you can deduct the lesser of $500,000 or 40% of the property value. Since the latter is $3.2 million, in this example you would deduct $500,00, decreasing the total estate value to $7.5 million instead of $10 million.
Keep in mind that only estates valued over a certain amount — $11.58 million in 2020 — must pay the estate tax, so most people don’t have to worry about it unless they’re very wealthy.
If you have a very large estate and you’re concerned about estate taxes, you can speak with an estate planning attorney.
Community land trusts are nonprofit organizations that use the land to benefit a neighborhood, most commonly through providing or preserving affordable housing.
The board of directors, which runs the community land trust, tends to include residents or renters who live in the community.
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