Easements

Conservation Easements and Rising Taxes

Interest in conservation easements has grown with the extreme increases in property values in many parts of the country. The resulting increased tax burden created some rather valuable estates that are "cash poor, but land rich." This shortage of cash sometimes means that even landowners who wish to preserve undeveloped land may have to sell or subdivide their land to pay the taxes. In addition to the payment of property taxes, estate taxes can be of particular concern. Since federal estate taxes are due within nine months of death, heirs have been forced to sell land to pay the inheritance taxes on it. Conservation easements are a tool which may help many landowners preserve their property intact

What is a Conservation Easement?

A conservation easement is a legal transfer of right to use all or part of a property for a certain purpose. Since the transfer is of some but not all of the property rights, it is known as a transfer of "limited rights." Usually the owner gives up the right to develop, improve or modify his or her property and the buildings on it. The owner, however, keeps the right to sell, give away or transfer ownership of the property. Her or she may continue to live on the property, develop a portion of it excluded from the easement, and keep any subsurface mineral rights.

In a conservation easement, the limited rights are transferred from a private landowner to a nonprofit conservation organization or government agency. The organization or agency is given the right to enforce the easement.

Why are they Used?

Many conservation organizations and local governments are interested in conservation easements as a way to acquire "green space" in an area that is being developed quickly or which has special values to preserve.

Landowners may have several reason to favor a conservation easement. They may wish to ensure that property is left in an undeveloped state even after their death. Landowners also use qualified conservation easements for financial and estate planning purposes. The easements allow landowners to reduce fair market value of their property. Three benefits may result: 1) upon their death, the inheritance taxes on the property are reduced or avoided; 2) a federal income tax deduction can be taken for the gift of the development rights; and 3) current property tax assessments are lower.

What Determines a "Qualified Conservation Contribution?"

Section 170(h) of the Federal Internal Revenue Code defines "Qualified Conservation Contributions." This part of the tax code indicates the conditions necessary for a conservation easement to qualify for deduction as a charitable contribution. In general, the contribution must be of a qualified real property interest to a qualified organization exclusively for conservation purposes. Specifically, the easement must meet several criteria:

1. Be "an easement or other interest in real property that under state law has attributes similar to an easement." The donor can and does retain any rights to use his/her land, such as to sell it, give it away, or transfer ownership. He/She also can continue to live on the property, reserve the right to develop some excludable portion of the property or keep subsurface mineral rights.

2. Be donated to a "qualified conservation organization." This includes charitable conservation organizations or governmental units, but not private foundations.

3. Be "for conservation purposes" and for the "substantial and regular use of the general public or the community." This includes public outdoor recreation and education, protection of habitats or ecosystems, preservation of "historically important land areas" or preservation of open space that will clearly yield public benefit.

4. Be enforeceable in perpetuity.

5. Have an agreement by the mortgage company that the easement remains in effect with any sale of the property, even if foreclosed.

6. Have "documentation sufficient to establish the condition of the property at the time of the gift."

How to Execute a Conservation Easement

Conservation easements can be written for property in any state. The feasibility of using one for a particular property will depend upon the local property taxes, state inheritance taxes and the desire of an agency or organization to receive the easement. Because conservation easements are a fairly new tool in estate and tax planning, there are apparently very few estate planners and attorneys who have experience with them. Landowners should consult with an attorney experienced in this area and with their financial advisors or accountants to determine if they would benefit from granting a conservation easement. The legal transfer of the easement must be written very carefully so that the landowner's wishes are carried out and so that the maximum tax benefits are obtained.