Tax Considerations in Selling or Donating an Easement

This Fact Sheet describes some of the tax issues surrounding the sale or donation of an agricultural preservation easement to the Maryland Agricultural Land Preservation Foundation (MALPF) program, including potential tax implications, the range of potential benefits, and the requirements for establishing a charitable contribution. 

The information in this fact sheet is for guidance and general planning purposes only.  It should not be used to make decisions on specific matters.  The tax advantages of easement donations and sales will vary with individual financial situations.  Consult a tax advisor or attorney for how an easement donation or sale would affect your taxes. 

Sale of an easement

Estate planning

By removing the development rights from your land, you will likely reduce the value of the property and, thereby, your estate. Especially for families whose primary asset is their land, this can be critical in preventing the farm from being sold to pay estate taxes.

Capital gains and Like-kind exchanges

The proceeds from a sale of an easement may be subject to capital gains. 

A method to minimize your capital gains liability is to use the proceeds from an easement sale in a like-kind exchange of property. Capital gains taxes normally due on the sale of development rights are deferred under this arrangement when the cash payment for the easement is used to purchase real estate. You should consult a real estate attorney if you are a landowner thinking about selling an easement and, also, buying more land. 

Bargain sale of donation of an easement

If an easement is sold for less than its full easement value (a "bargain sale") or donated, the uncompensated value may be treated as a charitable contribution for state and federal income tax purposes. An independent appraiser hired by the landowner will determine if a charitable contribution has been created by the transaction and its value.

Please note that the Foundation's method of easement valuation is determined by Maryland law and is incompatible with the requirements of the Internal Revenue Service (IRS). MALPF's calculation of an easement value cannot be used to establish a charitable contribution for tax purposes. A bargain or discounted sale of an easement as calculated by MALPF may not result in a charitable contribution under IRS requirements.

There may be federal and/or state income tax benefits as a result of a bargain sale of the easement. To determine whether your transaction may be eligible, you will need to consult a professional tax advisor.

The impact of an easement sale or donation on property taxes

Some landowners expect that selling an easement on their farm will reduce their property taxes. Farms already receiving an agricultural assessment will continue to receive that agricultural assessment as long as the land remains in active agriculture, which means that there will be no impact on the property tax obligation. Existing or new residential improvements will continue to have the most significant impact on assessment values, and such improvements are subject to changes in the residential real estate market, and not subject to the easement placed on the remainder of the property.

Some Maryland counties offer property tax credits or other tax benefits for landowners committing not to develop their properties. You should consult with the program administrator in the county where your property is located to determine if you qualify for any additional county tax benefits from selling or donating an easement on your property.