conservation_easements

Conservation Easements

What is a Conservation Easement?

Visualize owning property similar to holding a bundle of individual sticks. Each one of those sticks represents your right as a landowner to do something with your property (build houses, extract minerals, lease the property, pass it on to heirs, allow hunting, etc.). You may give up certain development rights, or sticks in the bundle, associated with your property through a document called a conservation easement.

A conservation easement is a voluntary agreement that allows a landowner to limit the type or amount of development on their property while retaining private ownership of the land. The easement is signed by the landowner (the easement donor) and the qualified non-profit organization, governmental body or other legal entity (the party receiving the easement). Typically, conservation easements are held and managed by a land conservancy or land trust.

A conservation easement allows landowners to work with government and land conservancy to prevent overdevelopment of fragile resources and to preserve scenic beauty and ecological integrity. To reach that goal, the conservancy or government agency accepts an easement on land which has special ecological, recreational, or scenic value. Special features may include forests, wetlands, endangered species habitat, beaches, scenic areas and more.

Another way to give land as a gift is by letting governmental entities or other non-profit organization purchase the land below the market value, which in itself involves a portion of the property value as a gift. The value of the gifted portion can be deducted from the donor’s federal income taxes.

A conservation easement is more than a deed restriction. The disadvantage of a deed restriction is that no third party can be designated to assume monitoring and enforcement responsibility. The law also limits who can enforce the restrictions and for how long. A conservation easement lets landowner give the right to enforce the restrictions to tax-exempt charitable organizations (government, non-profits).

Why Grant a Conservation Easement?

People grant a conservation easement to protect their property from unwanted development while still retaining the rights of land ownership. The easement guarantees the property will be protected forever, regardless of who owns the property in the future. The monitoring and enforcement of the easement will protect the land for many generations to come.

The activities allowed by an easement depend on the landowner’s wishes and characteristics of the property. Therefore, each conservation easement is unique, tailored to the landowner’s wishes. Also, since the landowner continues to own the property after executing the easement, he/she can lease, sell, or give the property as before. However, the subsequent owners are bound to the conditions of the easement.

The land has no public access unless the landowner specifically allows it. It is also the right of the landowner to cover only a portion of the property with the easement. So it all depends on the landowner’s wishes.

How Do You Get Financial Advantages Out of a Conservation Easement?

You can get significant financial advantages from donating an easement. Most landowners receive a federal income tax deduction for the gift of a conservation easement. The donor may also receive estate and property tax relief. The deduction is allowed only if the easement is perpetual and donated “exclusively for conservation purposes” to the government or a qualifying conservation organization. The amount of tax deduction is determined by the value of the conservation easement. The more significant the land is and the more it adds to the public good, the more likely it is that you will qualify for the deduction.

The tax deduction depends on the amount of “gift” you give through the easement. For example, before the land has a conservation easement, developers can come in and subdivide the land to build house lots and condos, etc. Because of the easement, the value of the land would go down (for example, before the easement, developers would value the land at $2.5 million, but after the easement, the land is valued at $1 million). The difference of those values (in this case is $1.5 million) is considered the gift from the landowner, and it determines the amount of the income tax deduction. However, there are caps on how much an individual can deduct each year based on their income.

The landowner retains full rights to control and manage their property within the limits of the easement. The landowner continues to bear all costs and liabilities related to ownership and maintenance of the property. Also, to help support the enforcement and costs associated with upholding the terms of the easement, easement donors are sometimes asked to make a financial contribution. This fund is used for long-term monitoring of every easement received.

Examples for Income and Estate Tax Savings

As described above, the value of the gift to a land conservancy is equal to the difference between the value of the property before the easement and the value after the easement. The income tax deduction is represented in the amount of the gift. However there is a limitation in getting the deduction of federal income tax. The general rule is a donor can only deduct the value of a conservation easement, up to 30% of the donor’s income for the year of the gift. The ‘unused’ portion of the gift remains available to be ‘carried forward’ and used as a deduction against the income tax for each of the next five years. Following are some examples to show the tax deduction.

Example: John and Mary and their Riverview

· Combined annual income is $200,000

· Their gift is $1,000,000. The number comes from the difference between the property (Riverview is the name of the estate) before the easement ($2,500,000) and after the easement ($1,500,000). But they are only allowed to receive a $60,000 tax deduction (30% of the combined annual income)

· Their other itemized deductions total $40,000. Yet they are only allowed a $37,636 deduction, since there are limitations in the tax law reducing itemized deductions for upper-income individuals and married couples.

So, here is the summarized income tax deduction for John and Mary (with the assumption that both landowner’s income and tax deductions are the same in 6 year time-span).

Without the donation

Years 1-6

Income $200,000

Deductions $37,636

Tax due $40,917

With the donation

Years 1-6

Income $200,000

Deductions $97,636 à $37,636 + $60,000

Tax due $22,059

Total tax due over 6 years $245,502

without easement donation

Total tax due over 6 years $132,345

with easement donation

Income tax savings $113,157

In addition to the income tax savings, John and Mary can save more on the estate tax savings.

General situation:

If the sale price of Riverview is $2,500,000 and the cost of Riverview was $100,000, they have $2,400,000 of gain; the federal income tax on the gain is $475,880. So now, after-tax proceed of the sale is $1,952,120 (these numbers exclude considerations of any special federal income tax benefits that might be available).

Assume that Mary dies first, leaving everything to John. When John dies, he leaves $1,500,000 in other assets.

Compare these situations below:

Without the easement

· The estate worth $3,453,120, which is added up from land value and other assets ($1,952,120 + $1,500,000)

· The federal estate tax on the $3,453,120 estate is $1,112,812. The estate tax in Massachusetts (Riverview is presumably in MA) is $224,604. Total tax due is $1,337,416.

· More than half of the proceeds from the sale of Riverview are almost gone just to pay for the total tax due! ($1,952,120 to cover $1,337,416 tax due)

· Riverview is gone without conservation easement. Developers come in and 80 houses and a small park cover the once-loved site.

· After paying estate taxes, the family has $2,114,704 left à [($1,500,000 + $1,951,120) - $1,337,416]

With the easement

Recall that the value of Riverview was reduced to $1,500,000; the deduction was $1,000,000; the income tax savings from the easement donation was $113,157.

Assume the landowners hold Riverview until they die. The estate of the survivor, consisting of $1,500,000 plus Riverview is taxed as follows:

· The federal estate tax on the $3,000,000 estate (land value plus other assets: $1,500,000 + $1,500,000) is $906,750. The Massachusetts estate tax is $182,000. Total estate tax due is $1,088,750.

· Riverview has four ‘reserved’ lots that can be sold at $150,000 each. This can help them pay the estate tax. Remember that conservation easement means only giving out developmental rights, so the landowners still have to rights to sell or loan the property. Because the landowners held their land until they died, there will be no (or very little) tax to pay on the proceeds of these sales

· If John and Mary’s heirs don’t want to keep Riverview, it can be sold (again with no or very little tax to pay), but Riverview will forever be protected.

· After paying estate taxes, the landowner family has $1,911,250 à $3,000,000 - $1,088,750. They also have Riverview, protected and conserved, in their hands.

· If we add $1,911,250 and $113,157 (income tax saving from easement donation), the dollar difference between selling out and holding on has virtually disappeared and John and Mary have left more value to their children by preserving Riverview! à $1,911,250 + $113,157 = $2,024,407

· Compare the final results with conservation easement ($2,024,407 + Riverview protected) vs. without easement ($2,114,704 but Riverview is gone)

**The examples above were taken from Preserving Family Lands: Book I by Stephen J. Small, Attorney at Law. More examples can be found in his Preserving Family Land series.

** Note that the examples used here are based on Massachusetts’ tax rates.

If John and Mary chose to give the property to their heirs before their deaths, even greater tax savings could be achieved!