For clients lucky enough to own land rich in natural beauty, they can save a bundle on taxes if they promise to basically preserve the property the way it is forever.
The promise is known as a conservation easement. It’s an agreement with state and federal governments to preserve and protect natural areas that have some special value in return for granting the owner tax benefits. If the land has a coastline, is home to wildlife, encompasses wetlands, is used for farming, includes a forest or has scenic views, it’s likely to qualify for an easement.
Stephen Small, an attorney in Boston who runs the Landowner Planning Center, is considered one of the foremost experts in tax and estate issues concerning family land. He says that despite rapid development of land and an increase in land values over the past 20 years, the planning community and their clients aren’t aware of conservation easements or the benefits they carry. “And many of these clients have ranches, country houses and such that carry family memories that they don’t want to lose or have changed in any way for their kids and grandchildren,” he says. A conservation easement can ensure that.
In exchange for permanently protecting their property from development, landowners who donate a conservation easement to a land trust or government entity can qualify for federal and (some) state tax benefits as long as: the easement is in perpetuity, it is done strictly for donation purposes and provides a “significant public benefit.”
It’s important to note that donors do not give up ownership of the land to the land trust. Nor are they required to make the land open to the public. They are free to pass the property on to their heirs or sell it. They just can’t change the terms of the easement and they need to be aware that the value of the property is likely to fall because it can’t be developed.
If all the qualifying requirements are met, donors of a conservation easement are eligible for a federal income-tax deduction of the market value of the gift—as determined by a qualified appraiser—up to 30 percent of adjusted gross income, with a five-year carryforward of the remaining balance. Thus, an individual who makes $200,000 annually and donates a property worth $1 million can deduct $60,000 in the first year (30 percent of $200,000) and 30 percent each of the next five years.
For estate-tax purposes, a donor can exclude 40 percent of the value of the conserved land up to $500,000 from the estate. Thus, the owner of a property worth $5 million before the easement and $3 million after, because the land is worth less without its development potential, will pay estate taxes on a property valued at only $2.5 million. In addition, certain states offer income-tax credits and property-tax deductions in connection with conservation easements.
According to Frederick “Fritz” Gahagan, an attorney with Waller Smith & Palmer in New London, Conn., the IRS is keeping a close watch out for overvaluations on appraisals of conservation easements, so it’s important that advisors not only have a working knowledge of the rules but also involve other carefully selected professionals. “Advisors will need a land-use planner or ecological consultant, a qualified appraiser with a track record of success and an attorney with extensive knowledge of conservation planning,” says Gahagan.
For further resources and to learn more about conservation easements, advisors should check out Stephen Small’s series of books, titled Preserving Family Lands: Essential Tax Strategies for the Landowner, what he calls “a layman’s guide” to the process (click here for his Web site). Another resource is the Land Trust Alliance (LTA), an advocate of land preservation and forum for the more than 1,500 land trusts in the U.S. The LTA also has information on different states’ conservation-tax incentives as well as legislative updates (click here for the LTA Web site). Another resource for information on conservation easements is the Nature Conservancy ( click here for more information), a nonprofit international organization that currently protects more than 15 million acres of land, more than two million of which is through conservation easements.
“Advisors with clients with real estate they care about—a farm, a ranch, a plantation, a country house—need to get educated about the tax issues and benefits involved so they can help them preserve it,” says Small. “There’s always going to be plenty of land for development, if anything, there will be a shortage of beautiful wide-open spaces.”