A conservation easement is a written agreement between a landowner and a public agency or a qualified conservation organization like a land trust. The donor agrees to keep the land available for agriculture and restrict subdivision or non-farm development, and the public agency or land trust is responsible to monitor and ensure that the terms of the easement are met.
Conservation easements are designed to keep land available for agricultural purposes, while still meeting the goals of the land owner. In most cases, new farm buildings can be built, and small home sites (usually one or two acres) can be reserved for family members.
After granting a conservation easement, land owners can still retain ownership while also being eligible for state and federal tax benefits. They are still allowed to use the land for farming and hunting, and can restrict public access. They maintain eligibility for federal and state farm programs, and can even use the land as collateral for a loan. They also continue to pay property taxes.
To receive tax benefits, the easement granted must be permanent. Owners can pass the property to their heirs, or sell or lease the property, but future owners have to continue to meet all the terms of the easement. To calculate those tax benefits, the value of the easement must be determined. The value of a conservation easement is generally the fair market value of the property, minus its restricted value. Generally speaking, intense development pressure and more restrictive agreements result in higher values.
Some of the income and estate tax benefits include:
• Donated easements are charitable gifts. As a result of a change in the law in 2015, donors can deduct up to 50% of their income (100% for family farmers and ranchers), with a 15 year carry-over for excess contributions. That means that with a high enough valuation, a farmer or rancher could offset ALL of their taxable income for up to 16 years.
• In addition, the presence of the conservation easement will typically reduce the value of the land for estate tax purposes.
• Several states also provide income and inheritance tax benefits on the state level.
Conservation easements are not without drawbacks however. Some of those drawbacks include:
• Not all landowners are financially able to donate an easement.
• Subsequent owners are not always interested in abiding by the terms of the easement.
• While the easement can prevent development of farmland, it can’t guarantee that the land will always be farmed.
• Easements have to be carefully drafted to allow the farmer or rancher to change or expand their operations, and make other adjustments as economic circumstances require.
• Conservation easements don’t prevent seizure through eminent domain, although the government entity doing the taking would have to compensate both the landowner and the holder of the easement.
• The IRS is not a fan of what they might call abusive conservation easements.
Because the law is somewhat complex and incentives available can be substantial be sure to seek professional advice before implementing a conservation easement.