We have all been told at one point or another that we simply “can’t have it all.” But for owners of recreational or agricultural land who desire to preserve the land, pass it down to their descendants as a legacy property, and achieve substantial tax savings, “(almost) having it all” is a possibility. Enter, the conservation easement – a valuable tool that can bridge the divide between these often competing interests.
What is a conservation easement?
“A conservation easement is a voluntary legal agreement between a landowner and a qualified organization to permanently restrict the rights to use and/or develop land in an effort to preserve its natural habitat or open space, or its agricultural, recreational, educational, scenic, or historical values.”
The qualified organization is typically a government organization or non-profit (usually referred to as a land trust), and its primary role is to monitor the property and work with the landowner to ensure that the easement agreement is being upheld. In exchange for creating the conservation easement, the landowner not only preserves the inherent value of all or a portion of land for the benefit and enjoyment of younger generations, but also becomes eligible for potentially significant tax savings.
What are the tax savings?
Assuming specific Internal Revenue Service (IRS) requirements are met, a landowner can benefit from both income tax and estate tax savings by donating a conservation easement to a qualified organization. The fair market value of the easement can then be claimed by the landowner as a tax-deductible charitable donation for income tax purposes. Alternatively, the landowner can sell the easement to a qualified organization at a discount (commonly called a bargain sale), and the value of the donated portion would be eligible as a tax deduction.
Additional tax savings may be achieved because a conservation easement reduces the value of the land it restricts which, in turn, reduces a landowner’s taxable estate upon death. A landowner’s heirs may also be eligible for an additional $500,000 estate tax exclusion under certain circumstances. The estate tax benefits of a conservation easement can be further increased by partnering the easement with other common estate planning techniques such as a family limited partnership (FLP), a family limited liability company (FLLC), or an irrevocable life insurance trust (ILIT).
Lastly, depending on the location of the property and its assessed value, there may also be property tax savings for transferring a portion of the property’s fair market value to the qualified organization.
Who can benefit most from a conservation easement?
Landowners who generally benefit most from a conservation easement are asset-rich, cash-poor agricultural families and high-net-worth families owning legacy property. These families often have a strong interest in preserving their land and protecting it from urban development, or can fully utilize the resulting income tax and estate tax advantages.
How do I create a conservation easement?
Creating a conservation easement and ensuring that it will qualify for tax benefits can be a complicated process.
The landowner should first identify a qualified organization that is interested in holding a conservation easement on the subject property and can confirm that the property has the requisite conservation values. The landowner will then negotiate with the organization as to whether the easement will be donated in its entirety for a full deduction or sold at a reduced, bargain price for a partial deduction. That decision will also be affected by the amount of the deduction that can be utilized by the landowner, as determined with the assistance of the landowner’s tax advisors.
The landowner and organization will then conduct diligence and negotiate the easement terms and timing. A qualified appraiser will also be needed to value the property and the easement. The appraiser should be particularly experienced in conservation easement appraisals because of stringent IRS requirements. After closing, various post-closing steps must then be taken to position the donation for proper deductibility.
This is a very general description of the conservation easement process. We recommend that any landowner interested in conservation easements consult with legal and tax advisors for assistance.
Originally published at lawonpurpose.com.