If you own a plot of land that's largely undeveloped, particularly one that includes forest or farmable areas, you may have heard that a conservation easement can help you ensure that your investment stays unchanged for generations to come. But if you've found yourself asking, "What is a conservation easement?" you're not alone.
To help clear up any confusion once and for all, below is an explanation of what a conservation easement is, how it works, and why many landowners ultimately choose to go this route. Plus, we take a look at some of the tax incentives you may be able to benefit from.
What is a conservation easement?
At its core, a conservation easement is an agreement between a landowner and a land trust or government agency under which certain uses of the property are restricted in order to preserve the land's natural or cultural features. Under the easement, the landowner and conservation organization typically work together to achieve certain objectives for the land.
Though these objectives will vary, they could include:
- Maintaining and improving water quality.
- Fostering the growth of a healthy forest.
- Maintaining or improving a wildlife habitat.
- Protecting scenic vistas from development.
- Ensuring that land remains available for sustainable architecture.
The decision to place a conservation easement on private land is completely voluntary, and the landowners retain the lion's share of control over the property. The land trust is only granted enough rights to ensure the conservation objectives are being satisfied. For example, a conservation easement may limit the right to substantially develop the land, but the landowner may still maintain the right to build a home and farm the land.
Why use a conservation easement?
Using a conservation easement is all about maintaining important conservation sites for future generations. Since conservation easements "run with the land" and are recorded along with the deed, these agreements are applicable to both present and future owners, meaning future owners must abide by the stipulations in the easement as well.
However, in addition to the benefit of preserving land, there are also substantial tax incentives to consider. Particularly for those who donate the conservation land to a charitable organization or public agency, it's possible to take advantage of several tax benefits at both the federal and state level.
What are the tax benefits of a conservation easement?
Federal income tax benefits
As long as the landowner makes an easement donation to a charitable organization, he or she may qualify for a federal charitable income deduction. To qualify, the donations must meet all the stipulations outlined in Internal Revenue Code Section 170(h), which includes conveying the easement to a qualified organization and agreeing that the easement exists in perpetuity.
If all the requirements are met, the value of the charitable donation is determined by an independent appraisal for tax deduction purposes. However, as a rule of thumb, it's possible to find an approximate value of the charitable contribution by calculating the difference between the value of the property before the easement is in place and the value of the property after the easement.
Potential easement donors should know that making one of these donations can substantially impact the land's fair market value. Much of the impact is determined by what sort of restrictions are in place against future use of the property. The biggest decrease in value comes when open space that's prime for development is placed under a particularly restrictive easement.
Federal estate tax benefits
Another main reason why conservation easements are donated is to help pass down land through generations without getting hit with massive amounts of estate taxes. These taxes can get high and often lead to families having to break up or sell their land, even when they wish that the land could stay intact.
Conservation easements work around this problem in two distinct ways. First, as stated above, placing an easement on the land lowers its value. In some cases, a conservation easement can drop the value of the land below the threshold where estate taxes need to be levied altogether.
Plus, under Section 2031(c) of the Internal Revenue Code, heirs may exclude up to 40% of the value of the land under a conservation easement from estate taxes. Right now, this exclusion is capped at $500,000, and the conservation easement must meet the following criteria in order to qualify:
- It must serve one of the conservation purposes outlined in Section 170(h) of the tax code.
- It must limit commercial recreational use.
- Only members of the original easement donor's family -- including spouses and descendants -- can claim this exclusion.
State and property tax incentives
In addition to the federal income tax deduction, 14 states also offer state income tax deductions. However, the most powerful of these deductions are the ones that are transferable. In five states, if a landowner donates an easement but does not owe enough tax to use the full value of their tax credit, he or she is allowed to sell the remaining credit to another taxpayer, which generates instant income. These states are:
- New Mexico.
- South Carolina.
The following eight additional states, as well as Puerto Rico, offer similar tax benefits but do not allow for a transferable credit:
- New York.
In addition, some jurisdictions also offer property tax savings in exchange for placing an easement on your land.
The bottom line
While conservation easements are fundamentally about preserving large areas of untouched land for future generations, it's worth noting that this endeavor also comes with substantial tax benefits. That said, in order to make use of these benefits, you must make sure that you're closely adhering to the provisions outlined in the tax code.
With that in mind, before moving forward with any of these exclusions, your best bet is to talk to a tax professional who can walk you through the specifics of your easement-related tax breaks. Beyond that, you may also want to talk to the land trust or government agency that is presiding over the easement to ask if they can assist you with some of the specifics.
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