Conservation Easements: Preserving Your Land and Creating Tax Benefits

If you own land that holds special meaning for you, you may want to ensure it remains protected for generations to come. Whether your goal is to preserve a scenic landscape, protect natural resources, or keep your property from future development, a conservation easement may offer an effective solution.

A conservation easement is a legal agreement that places certain restrictions on how land can be used or developed. In addition to helping preserve property for future generations, establishing a conservation easement may provide valuable tax benefits.

What Is a Conservation Easement?

A conservation easement is typically created when a landowner enters into a legal agreement with a charitable organization, often called a land trust, or a government agency. Through this agreement, the organization or agency receives certain rights to preserve and protect the property for the public benefit.

Importantly, the original landowner retains ownership of the property and may continue using it for certain permitted purposes. These uses can include some commercial activities, such as farming or sustainable logging.

Consider the following example. Sally inherits a large tract of land from her grandmother. The property is visible from a scenic highway and offers beautiful views of a nearby mountain ridge. It also includes a cabin that Sally would like to continue enjoying throughout her lifetime.

However, Sally is concerned that the property could eventually fall into the hands of a developer who might subdivide the land into residential lots, permanently changing the landscape and obstructing the scenic views.

A conservation easement could help Sally protect the property's natural beauty through an enforceable agreement with a charitable land trust or government agency while preserving her right to possess and enjoy the cabin.

Conservation easements are frequently used to protect natural resources and environmentally significant properties, including:

• Rivers, lakes, and beaches

• Forests and other natural habitats

• Open spaces and scenic landscapes

• Habitats that support native plant and animal life

These agreements can also help preserve land for outdoor recreation and educational opportunities, allowing the public to benefit from protected natural spaces while the landowner continues to enjoy the property within the easement's restrictions.

Income Tax Benefits of Conservation Easements

Beyond their environmental and societal value, conservation easements can offer significant tax advantages to landowners.

Congress established tax incentives to encourage property owners to voluntarily conserve land for the benefit of the general public. Under the federal tax code, a donor who grants a qualifying conservation easement may be eligible for a charitable income tax deduction of up to 50 percent of their adjusted gross income (generally calculated without regard to any net operating loss carryback) for the taxable year.

If the donor cannot use the entire deduction in one year, the unused portion may be carried forward for up to 15 years, subject to the same annual limitations.

Additional benefits may be available to qualifying farmers and ranchers. Generally, someone who earns more than half of their gross income from farming or ranching may deduct up to 100 percent of their adjusted gross income, provided the conservation easement keeps the land available for agricultural use.

Certain pass-through entities may also transfer the tax deduction to their owners, subject to additional rules. These entities include:

• S corporations

• Partnerships

• Limited liability companies (LLCs)

Some states, including Colorado and Virginia, also provide tax credits or deductions for establishing conservation easements. Consult your tax advisor to determine whether similar incentives are available in your state.

Estate Tax Benefits of Conservation Easements

Landowners who prefer not to donate a conservation easement during their lifetime may instead choose to establish one at death as part of their estate plan. This approach can provide meaningful estate tax benefits for heirs who inherit the property.

For example, Bob could include a provision in his estate planning documents granting a conservation easement on a parcel of land valued at $1.5 million at the time of his death. If the conservation easement is valued at $500,000, meaning the property is worth $500,000 less to a successor landowner because of the easement, the federal tax code would allow Bob's estate to exclude up to 40 percent, or $400,000, of the property's remaining $1 million value.

The applicable exclusion rate depends on the easement's value relative to the property's value before the easement was established. This particular exclusion is subject to a $500,000 cap.

Although this is a simplified example, it demonstrates how incorporating a conservation easement into an estate plan may offer substantial benefits to future generations.

Because every family's circumstances are different, it is important to consult with both a qualified tax advisor and an experienced estate planning attorney before deciding whether this strategy is appropriate for your situation.

The Requirements for Establishing a Conservation Easement

Although the concept of a conservation easement is relatively straightforward, creating one that qualifies for the tax benefits described above requires careful planning and compliance with several legal requirements.

To be recognized by the Internal Revenue Service (IRS), a conservation easement must meet the following criteria:

• A Qualifying Conservation Purpose: The easement must serve at least one conservation purpose recognized under the federal tax code. Qualifying purposes include:

• Protecting relatively natural habitats for fish, wildlife, or plants.

• Preserving open spaces, including farmland and forestland, for scenic enjoyment or in accordance with a clearly defined government conservation policy that provides a significant public benefit.

• Providing outdoor recreation or educational opportunities for the general public.

• Preserving historically important land or property containing a certified historic structure.

• A Qualified Recipient: The conservation easement must be donated to a "qualified conservation organization." Eligible recipients may include government entities, such as state or local agencies, charitable organizations, and certain other tax-exempt organizations. The federal tax regulations specify which organizations meet these requirements.

• The Ability to Enforce the Easement: The organization receiving the conservation easement must have the resources necessary to enforce the restrictions placed on the property. It must also be committed to protecting the conservation purposes established by the agreement.

• A Permanent Restriction: The easement must be established to last "in perpetuity," meaning indefinitely. Its restrictions must remain in effect and bind all future owners of the property. An easement that does not impose a perpetual restriction will not qualify.

• Proper Public Recording: The conservation easement must be recorded in the local land records to provide notice of its existence to interested parties.

Meeting these requirements is essential to ensuring that the conservation easement is properly established and eligible for the intended tax treatment.

Why a Qualified Appraisal Matters

In addition to satisfying the legal requirements, landowners must take particular care when determining the value of their property and the conservation easement itself.

An experienced, qualified appraiser should evaluate the property's value both before and after the easement is granted. The difference between these valuations helps establish the value of the conservation easement and, consequently, the potential charitable deduction.

Unfortunately, there is a history of unscrupulous appraisers and landowners abusing the tax code by overstating property or easement values to inflate charitable deductions.

The IRS has increasingly scrutinized these practices and aggressively reviews appraisals that appear inconsistent with the circumstances. To support the valuation, appraisals should be accompanied by thorough documentation.

If the applicable appraisal and documentation requirements are not satisfied, the IRS may:

• Disallow the charitable deduction

• Impose penalties on the donor

Working with an experienced appraiser, tax advisor, and estate planning attorney can help ensure that the conservation easement is properly structured and documented.

More Than a Tax Strategy: Preserving Your Legacy

While the potential tax benefits of conservation easements can be substantial, their value extends far beyond financial considerations.

For many landowners, the greatest benefit is the opportunity to leave a lasting legacy. By protecting natural resources, preserving scenic landscapes, and maintaining environmentally significant properties, a conservation easement can help ensure that future generations continue to enjoy the beauty and sustainability of the land.

It is a meaningful way to align your estate planning goals with your personal values while creating a lasting public benefit.

Explore Your Estate Planning Options with Strauss Attorneys

Wondering whether a conservation easement belongs in your estate plan? The right strategy depends on your property, financial circumstances, and long-term goals for your family and the land you own.

Our highly skilled team can help you understand your estate planning options, evaluate whether a conservation easement may be appropriate, and consider how it fits into your broader legacy planning goals.

Contact Strauss Attorneys today to schedule a consultation and learn more about our estate planning services. We would be happy to discuss your goals, answer your questions, and help you determine the next steps toward protecting your property and your legacy.