CONSERVATION EASEMENTS: HOW PRESERVING LAND CAN PROVIDE TAX BENEFITS FOR OWNERS
by Nancy A. Roberts
What is a conservation easement?
A conservation easement is a legal agreement between a landowner and a qualified entity (a non-profit conservation organization or government agency whose mission is to conserve land) that permanently prohibits specified land uses on the easement parcel that are not compatible with conservation values, while allowing those uses that are compatible.
How do conservation easements affect property rights?
Every landowner holds certain rights related to the use of their land and its resources. The law allows some of these rights (such as mineral rights or development rights) to be transferred to other parties. A conservation easement transfers the development rights on a property to a qualified entity that is legally bound to enforce the terms of the easement. The landowner still owns the land and retains all other rights and responsibilities not specifically prohibited by the conservation easement and that are not inconsistent with the specified conservation goals.
What land uses do conservation easements typically prohibit?
Every conservation easement is different depending on the conservation goals and each landowner's circumstances. However, most will prohibit any new development, confined livestock feeding operations, mining, logging, and the destruction of wildlife habitat, native plant communities or historic sites.
What land uses are typically allowed?
This list is driven by each landowner's needs so it can vary, but the landowner usually retains the rights to live, farm, ranch, hunt, fish, and camp on the land, along with other activities that are consistent with conservation goals. That can sometimes include additional buildings but more often future construction locations are not included in the easement.
Do conservation easements restrict a landowner's ability to sell or bequeath land?
Land protected by a conservation easement may be sold or transferred at any time, but the conservation easement should be recorded and is attached to the title so that its terms, including any use restrictions, will apply to all future owners.
Does a conservation easement grant public access to the land?
Not unless the landowner desires to provide public access. Some conservation organizations or public agencies may request that the landowner allow access to the easement for educational or scientific purposes.
What rights of access would the easement holder have?
The access criteria are addressed in the easement agreement. An easement holder is normally obligated to conduct an annual site monitoring visit to assure compliance with the terms of the easement.
How are conservation easements enforced?
When conservation easements are created, a baseline report is prepared that documents the conservation values of the parcel. Among other things, baseline reports may include detailed maps, an inventory of plants, animals, wetlands, woodlands, grasslands, existing development, any historic sites and photographic documentation of individual items and the parcel's overall visual appearance. When annual monitoring visits are performed, existing conditions are compared to those in the baseline report. If a violation is identified, the landowner should be notified and an attempt made to agree on a solution that corrects the problem. If necessary, the easement holder can also take legal action to fulfill its conservation easement obligations.
What are the tax benefits associated with donation of a conservation easement?
Every situation is different, but the Internal Revenue Service will allow the appraised value of a donated easement (development rights) to be taken as a charitable deduction from federal income taxes. Conservation easements can also lower the value of land in an estate which can lead to a savings on estate taxes. Some of the landowner costs associated with creating an easement may be tax deductible as well.
How does a landowner qualify for a federal income tax deduction?
To qualify, a donated conservation easement must be considered a "qualified charitable contribution" by the IRS. Generally, this means that the easement parcel has conservation value; it is donated to an IRS-qualified non-profit organization; and the easement must be permanent and granted exclusively for conservation purposes such as the preservation of natural resources or historic sites.
Can a landowner deduct the entire value of a conservation easement from their federal income tax?
The IRS will allow a deduction up to 30% of the donor's adjusted gross income in the year the donation is made. Any unused portion of the deduction can be carried forward and used over the next five years, up to 30% of the donor's adjusted gross income in those years.
To illustrate, if a landowner has 100 acres that were appraised in accordance with IRS requirements at $8,000 per acre for a possible housing development (the before value), and $2,000 per acre as agricultural land (the after value), then the "value" of the easement is $6,000 per acre or $600,000. This is the amount the landowner would give up by entering into a conservation easement that eliminated the prospect of some day developing the land into a housing project. Therefore, it is the charitable gift that could be deducted over six years.
How can a conservation easement lower one's federal estate tax?
When a conservation easement is placed on the land it can remove a portion of the property's value from the estate. In the example given above, the land's value for estate tax purposes would have been reduced from $800,000 to $200,000.
Additional IRS provisions may allow for other options to reduce estate taxes. For example, under provisions of the 1997 Taxpayers Relief Act, if the easement is within 25 miles of a metropolitan area or National Park, up to 40% of the land's remaining after value can also be excluded from the estate. If the above example fit this qualification, it would amount to another $80,000 reduction (40% of $200,000) for estate tax purposes, with a total reduction from an original $800,000 before the easement, to $120,000 after.
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