Land Management: Conservation Easements

• If it has buildings of historical significance, or is part of a battlefield, an organization such as the National Trust for Historic Preservation may wish to enter into an agreement conserving its unique character in perpetuity.
• An organization such as Ducks Unlimited or the Nature Conservancy may accept an easement protecting a significant wildlife habitat containing special natural attributes.
• Limiting development of property commanding an impressive view may be of interest to local land trusts.
• Organizations also exist that are dedicated to the preservation of ranch and farm land.
• Less commonly, easements have been created in order to preserve land for public outdoor recreation or education.

Taking the form of a written agreement between the landowner and the conservation organizations, easements are quite adaptable to the individual circumstances of the case. Rights that the owner wishes to retain can be written into the agreement–even the right to subdivide, build an additional structure, retain timber, mineral or hunting rights, etc.

Tax issues

An easement is regarded as a charitable donation–the value of the donation being equal to the loss of value of the affected property. This can run from less than 20% to more than 90% of the property’s unencumbered value. Naturally, the more rights retained by the landowner, the lower will be the value of the easement.

The donation is deductible from income taxes up to a limit of 30% of income. Any excess can be carried forward for five additional years. Landowners granting easements with substantial value can even stagger their gifts in order to extend the tax deduction benefits.

Although it is not assured, an easement also may reduce the property value in the eyes of local tax assessors, resulting in savings on property tax.

Potentially the biggest advantage of conservation easements is in the estate tax. Easements are often cited as responsible for keeping in the family valued property that might otherwise have to be sold to pay estate tax. Recent changes to the tax code have given additional support to those contemplating the granting of an easement in order to keep a property in the family:

• The Taxpayer Relief Act of 1997 allowed an additional estate tax deduction of up to 40% (a maximum of $500,000 in 2002) of the otherwise taxable value of land subject to a qualifying conservation easement. The law applied to land close to metropolitan areas, national parks, Wilderness Areas and Urban National Forests. However, the tax act of 2001 extended the benefit to land anywhere in the United States. To qualify, the easement must protect outdoor recreation or education resources, wildlife habitat or open space “for the scenic enjoyment of the general public or in fulfillment of a . . . public conservation policy.” Easements solely for historic preservation do not qualify under this particular provision of the law.
• In 1998 Congress made the grant of postmortem easements possible. So long as no income tax deduction is taken for the easement, the estate can grant an easement, deduct its value, and, if applicable, claim the additional deduction authorized in the 1997 Act. To qualify, the easement must be in place by the estate tax return filing deadline including extensions.

Additional considerations

In practice the agreement for an easement must carefully spell out the rights that are being ceded and those that are being retained and must be binding on both parties For this purpose the assistance of an attorney specializing in real estate matters is essential. There must be something special or unusual about the land that you are protecting, although a great variety of properties, large and small, can be found to qualify. The agreement must be with a legitimate charity or government agency. In order to substantiate a tax deduction, the value assigned to the easement must be supported by a qualified appraisal. Often a cash donation accompanies the grant of an easement in order to help the grantee organization maintain the rights ceded to it.

An easement is generally not appropriate when a quick sale is contemplated. The tax benefits notwithstanding, most people who grant conservation easements have a genuine interest in preserving the environment. Although an easement is regarded as reducing the market value of the property on which it is granted, the reverse is sometimes the case. Certain buyers it seems are actually willing to pay more for conserved land.

As you can see, a conservation easement can be a key part of a family’s financial and estate planning. After all aren’t a family’s landholdings worth as much planning attention as a family’s business?