What is a conservation easement?
A conservation easement is an agreement between a landowner and a land trust. It is a way for a willing property owner to permanently limit activities on their land for conservation benefit. While remaining owner of the land, a landowner gives or sells particular rights in the land to a “qualified holder” (usually a land trust), which effectively extinguishes those rights forever. The easement is recorded in the Registry of Deeds and runs with the property. The holder then monitors the land annually forever (in perpetuity) to make sure that the terms of the easement are met.
Easement Stewardship Contributions. Just as museums often request a stewardship gift along with a donation of fine art, because caring for it over time is costly, land trusts (including the DRA) generally request donations toward their stewardship funds along with each donation of a conservation easement.
How do conservation easements work?
Property rights are divisible. As a property owner, I have a number of rights in my property under law. The right to exclude other people, the right to develop the land, use the water beneath, cut the timber above, mine the gravel, subdivide and sell a portion, and on and on. The usual property law analogy is that property rights are like a bundle of sticks where each stick represents a particular right in the property, which I can give away or sell.
First and foremost, conservation easements constrain future development of the land, preventing or limiting new structures of all kinds as well as subdivision. They also usually address mining and other permanent alterations of the ground.
Then, depending on the site, its conservation values, and the goals of the landowner and the agency or organization with whom the landowner is working (such as scenic preservation, habitat protection for plants or wildlife, historical/archaeological preservation, water quality) a conservation easement may limit or prohibit groundwater extraction, logging, pesticide application, road construction or other alterations that conflicts with the protection of the resource. Most of these provisions would apply for a majority of lands of DRA interest.
Finally, a conservation easement may include provisions for public access to certain areas of the land or may, in special cases, require that particular sections be maintained in certain conditions. For example, a farmland-oriented easement might require certain existing fields be kept open to allow for future farming.
Does donating a conservation easement offer tax benefits?
As with all tax related-questions, the answer really hinges on the particular circumstances of the donor and the specifics of the transaction, so “it depends” and qualified counsel should always be consulted. That said, under many circumstances the answer is yes. Conservation easements may confer tax benefits in three areas: property tax, income tax, and estate tax.
Property Tax: To the extent that the limitations placed on use of a property reduce its value, a town’s assessment of value should reflect that reduction. Property owners may also enroll their land in a special state tax-reduction category called “open space” if it meets certain criteria, and permanent protection by easement often helps with that qualification.
Estate Tax: Depending on total holdings in an estate, reducing the value of a property holding by placing a conservation easement on the land may make it easier to pass it along to the next generation from the standpoint of state and federal estate taxation.
Income Tax: The IRS may grant tax deductions for conservation easement donations as they do for other types of charitable gifts, though rules for conservation easements are very specific. In particular, required appraisals for conservation easements are specialized and should be conducted only by a specifically qualified appraiser.
In general terms, the charitable value of the gift of a conservation easement can be represented as follows:
Charitable Gift Value = (A-B) – C
Where . . .
A = The value of the land before the easement is executed
B = The value of the land after the easement is executed
C = Enhancement Value, i.e. the amount by which the creation of the easement adds value to nearby lands owned by the donor or other related parties
Please note: DRA only signs complete 8283 forms after reviewing the appraised value represented by the donor’s appraiser (which is true for outright donations of land as well). DRA reserves the right not to sign an 8283 it is not comfortable with and will not participate in fraudulent transactions. In all cases, donors should consult their own tax and legal advisors as DRA cannot and does not provide tax or legal advice.
A Fictitious but True-to-Life Example of an Easement Donation Process
Ruth Riverlover owns a 50-acre property on Cranberry Cove that has been in her family for more than 90 years, now worth $1,500,000. She has a son who is involved and interested in the land. A lovely cottage is located on the land, but it’s on the edge of the property well set back from the river. The rest is relatively wild, including forest, field, wetland and undeveloped shoreline.
It is an exceptional property, highly visible from the Damariscotta River, with numerous conservation and public values, including a heron rookery and a beloved access point to the river, known colloquially as Swim Point. Ruth wants to be sure the land is permanently conserved for wildlife and the community, and that future generations be allowed continued (respectful daytime pedestrian) access to Swim Point.
So, Ruth approaches DRA to discuss donating a conservation easement. Together with the River Association, she develops a conservation easement that will cover 45 of the 50 acres, leaving 5 acres around the cottage out of the easement entirely, maintaining options for future generations within that excluded area. The easement allows public access to Swim Point, protects a large stretch of shoreline, and prevents subdivision, mining, heavy timbering, and alteration of the wetlands, and construction other than minor footpaths and trail structures, with a particular focus on preventing disturbance of the rookery.
DRA’s lands committee and board approve acceptance of the easement based on their targeted criteria, and Ruth makes the gift. A skilled appraiser determines the value of the gift, based on the effect of the easement on the entire property. Before, as noted, the entire holding was worth $1,500,000. Afterward, it was worth $1,000,000. Ruth and parties related to her held no surrounding real estate enhanced by the gift, so the total value of the charitable gift was $400,000. Ruth’s adjusted gross income (AGI) is $210,000 and the cost basis for the property was negligible. So Ruth elects the 30% deduction maximum and thus may deduct up to $70,000 per year (30% of $210,000). She can’t use the whole deduction in year one but is permitted to spread the deduction out over the subsequent five years. If we assume her AGI does not increase, here’s what her deductions might look like:
- Year 1: $70,000
- Year 2: $70,000
- Year 3: $70,000
- Year 4: $70,000
- Year 5: $70,000
- Year 6: $50,000
Of course if Ruth’s income were much lower, or the gift value more than $20,000 higher, she would not have been able to make use of the whole deduction using this particular approach. However, alternative approaches may be possible in such a case beyond the scope of this example, and we’d be happy to discuss them.
Please note: Landowners should consult their own tax and legal advisors as DRA cannot and does not provide tax or legal advice.