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Farmland Preservation: Frequently Asked Questions

What is a farmland preservation program?

First, it is a voluntary program. Typically, a local not-for-profit organization or unit of government establishes a program to purchase and hold development rights from willing landowners. Landowners then agree to sell (or donate) their development rights, but maintain ownership of the land. The McHenry County board approved a local program in June 2006, and hopes to establish a farmland protection commission in early 2007.

What is a development right?

There are a bundle of rights than can be separated from a property and sold from that property without selling the property itself--mineral rights being the most commonly understood. Development rights, the rights to subdivide or develop a property, can also be sold from that property. In the case of agricultural land, a farmer can sell his development rights--the value of which is usually the difference between the development potential and its value as farmland.

How long does an agricultural easement last?

Forever.

Has this been done anywhere else?

Yes, there are over 1 million acres of crop and ranch land protected through such programs in the United States. Kane County, Illinois has a program with a waiting list of landowners who want to preserve their land for agricultural production.

Are there tax implications to consider?

Yes. Here are a couple of examples:

• 2006 Tax Benefit Changes In the most sweeping changes to Conservation Tax Law in two decades, recently passed legislation offers qualified farmers:
  
  

  • An increase in the charitable deduction they can take for donating a conservation easement from 30% of their adjusted gross income in any year to 50%.
    
    
  • Allows them to deduct up to 100% of their income if their land remains available for agriculture production.
    
    
  • Increases the number of years over which a donor can take deductions from 5 to 15 years.
    
    
  • Applies to easements donated only through the end of 2007.
    
    
  • At least 50% of household income must come from agriculture. Interested landowners should contact their tax advisor.
    
    
• 1031 Exchange The money a landowner receives from selling the development rights is subject to capital gains tax. However, the family can defer that tax through an IRS device called a "like-kind exchange," which allows the farmer to reinvest the proceeds of the sale into another enterprise (for instance, purchasing additional farmland).
  
  
• Bargain Sale If the development rights are sold at a price below fair-market value, the value of the difference can be deducted as a charitable donation on the federal tax return. This can be used to offset capital gains taxes that the landowner may otherwise be subject to as a result of the sale.

What about property tax implications?

If the land is currently assessed at farmland values, then there will not be any change to the assessment. If the land is assessed at development value, then it should be reduced to a farmland assessment.

Where will the money come from?

A local funding source has not yet been identified. However, once a local program is in place, the County program will be eligible to participate in the federal matching program which provides up to 50% of the funds to purchase development rights on qualified farmland. Kane County has already received over $4 million in matching Federal dollars for their program. Kane County is currently the only Illinois county with a program.