What is a conservation easement?
A conservation easement is a voluntary and legally binding agreement between a landowner and a land trust.
When a landowner donates an easement to a land trust or public agency, she or he is giving away some of the rights associated with the land. The easement permanently limits uses of the donated parcel in order to protect its conservation values, as specified in the Internal Revenue Code (IRC) 170(h).
Conservation easements offer private landowners flexibility in protecting their land. For example, a donating landowner can retain the right to grow crops on a parcel while, at the same time, relinquishing the right to build additional structures on the parcel.
The land trust is responsible for making sure that a landowner adheres to the conservation terms of the easement. An easement may apply to all or a portion of the property and may or may not allow for public access to the property. A landowner who has donated a conservation easement can sell the land or pass it on to heirs, and future owners of the property are bound by the terms of the easement.
How does the tax incentive work?
If a conservation easement is voluntarily donated to a land trust or government agency, and if it benefits the public by permanently protecting important conservation resources, it can qualify as a charitable tax deduction on the donor’s federal income tax return.
The tax law related to conservation easement increases the benefits to landowners by:
Enabling a deduction that a donor can take for donating a conservation easement of 50% of his or her annual income;
Allows a carry-forward period for a donor to take a tax deduction for a conservation agreement to 15 years; and
Allows qualifying farmers and ranchers to deduct up to 100% of their income;
Enables the highest easement values to be found on tracts of open space under high development pressure.
Can anyone deduct more than the value of his or her gift of an easement?
One can never deduct more than the fair market value of the gift. The permanent incentive simply allows landowners to deduct more of that fair market value. The fair market value of the donation is determined by a qualified appraisal.
Who qualifies as a farmer or rancher?
The IRS (IRC 2032A(e)(5)) defines a farmer or rancher as someone who receives more than 50% of his or her gross income from “the trade or business of farming.” The law references IRC 2032A(e)(5) to define activities that count as farming, including:
Cultivating the soil or raising or harvesting any agricultural or horticultural commodity (including the raising, shearing, feeding, caring for, training and management of animals) on a farm;
Handling, drying, packing, grading or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant or operator of the farm regularly produces more than one-half of the commodity so treated; and
The planting, cultivating, caring for or cutting of trees, or the preparation (other than milling) of trees for market.
For an easement to qualify for a farmer or rancher, it must contain a restriction requiring that the land remain “available for agriculture.” This provision also applies to farmers who are organized as C corporations.
Do these changes apply to gifts of land?
The expanded incentive does not apply to gifts of land in fee. It only applies to gifts that qualify under IRC 170(h)(2), such as conservation easements. A landowner considering the donation of land should consult an attorney to determine whether the structure of his or her gift should be changed to take advantage of the permanent incentive.
What other restrictions apply?
Conservation easement donations must comply with “conservation purposes” as defined in IRC 170(h). A donated easement must be a true gift. It must protect significant natural, agricultural or historic resources that public agencies or land trusts want to have conserved. A donated easement cannot serve to simply prevent development on a property or be part of a “quid pro quo” agreement in exchange for a government action, such as issuance of a building permit or a zoning change.
What is the role of the land trust?
Potential easement donors should know that donating a permanent conservation easement is a big commitment requiring careful consideration and independent legal advice. Donating a conservation easement requires a working partnership with a land trust (such as the Southern Tier Land Conservancy) — and time for careful drafting of documents and maps, baseline documentation and a professional appraisal. Landowners should understand that a land trust may decline to accept a donation that does not meet both the legal requirements and the land trust’s own specific charitable mission and strategic plan. In addition, the Southern Tier Land Conservancy staff will want to see the appraisal before accepting your gift.