Tax Benefits of Conservation Easements: Preserving Land and Wealth

Land is a finite resource. With every passing year, it seems, more and more commercial buildings and residential developments spring up in what was formerly green space. While many people lament these changes, it is difficult to blame landowners for selling their property or allowing development on it, especially when doing so is profitable. But there is an alternative for landowners that protects their wealth, preserves the land, and benefits the community and the environment: conservation easements.

What is a Conservation Easement?

A conservation easement is a binding agreement between a landowner and another party, usually a government agency or nonprofit organization such as a land trust. The agreement restricts the use of a parcel of land not only for the current landowner but for future owners of the property; the legal term is that the easement “runs with the land.” A conservation easement may require that a piece of land be kept in its natural condition, or limit the land to certain types of use, such as agricultural.

Like any binding agreement, there is a benefit to each party from a conservation easement. The government or land trust represents the interests of the public. The easement allows them to protect biodiversity and animal habitats, prevent pollution, preserve historically or culturally significant sites, provide recreational access for the community, and perhaps even mitigate climate change.

These easements can also provide a financial benefit to the state and local government; preserving open space can make the area a more attractive place to live and visit, increasing the local tax base and revenue from tourism. Agricultural easements preserve farms and strengthen the local food production and agriculture industries.

Landowners benefit from the knowledge that they are partners in protecting important natural resources, and that the land will not be developed in a way that is contrary to their values. Conservation easements are voluntary, and as such, offer a great deal of control to the landowner about how the land will be used going forward (so long as the agreement meets certain requirements). These easements are planned giving tools that allow landowners to shape their legacy. But often, the most significant incentive to enter into a conservation easement is the tax benefit to the landowner.

Tax Benefits of Preserving Land

There are multiple ways in which granting a conservation easement can reduce the tax burden on landowners and their estates.

Income Tax Benefits of Preserving Land

Granting a conservation easement can allow landowners to claim a charitable deduction on their federal income taxes, and possibly on their state income taxes. The appraised value of the easement determines the deductible amount, which is the difference between the value of the property before the easement and the value afterward.

The allowable amount of the deduction in a given year is limited in most cases to 30% of an individual landowner’s adjusted gross income (AGI), or 50% of AGI for qualified farmers and ranchers. However, if the easement’s appraised value exceeds the allowable amount, any excess can be carried forward, in some cases for up to 15 years.

Property Tax Benefits of Preserving Land

Because a conservation easement restricts the permissible uses of a piece of property, it also reduces the value of the property. A buyer is unlikely to pay as much for a parcel of land they cannot develop or use in certain ways. Because the value of the land is reduced, property taxes based on the land’s value will also go down after the sale or donation of a conservation easement.

Estate Tax Benefits of Preserving Land

The same reduction in property value that causes property taxes to drop also reduces the value of the landowner’s taxable estate. This may cause the estate to be in a lower estate tax bracket than if the use of the land was unrestricted; in some cases, it may drop the value of the estate to a level at which no estate tax is owed. In addition, the portion of the land’s value that is associated with the conservation easement is excluded from the landowner’s taxable estate, further reducing tax exposure. However, there may be a cap on the amount of this exclusion.

Who Should Consider Granting a Conservation Easement?

You may want to consider donating a conservation easement if any of the following apply to you:

• You are concerned that the need for liquidity to pay estate taxes could cause your land to be subdivided and sold after your death.
• Your property has historic or scenic significance, such as historic buildings or other structures, or a beautiful view that could be destroyed by development.
• You own farmland that you want to continue to be used for agricultural purposes or you want to promote sustainable agricultural practices on the land.
• Your land has been in your family for generations and you want to keep it in the family for future generations.
• You want to realize the tax benefits of an easement, and restrictions on the use of the land will not affect your enjoyment of it.
• You value outdoor recreation such as hiking, hunting, and birdwatching, and you want your legacy to include increasing public access to such activities.
• You want to preserve and increase wildlife habitats on your land and protect local wildlife from development that could destroy their habitat and food supply.
• You are concerned about protecting the environment from air, water, and soil pollution.

A conservation easement can be a meaningful part of your estate and tax planning and should be discussed with an experienced estate planning attorney as well as your tax professional.

The Bottom Line

Land conservation easements offer many benefits and can be a “win-win” for both landowners and the public. However, these easements result in a permanent restriction on property used in almost all cases, so they should not be granted lightly. To learn more about the potential benefits and risks of granting a conservation easement, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.