As one of the most significant tax credits available to large property owners, understanding exactly what Conservation Easements are can be very important. These easements not only provide massive tax benefits but also can protect family-owned property for generations to come. Here at LandLeader, we will be breaking down exactly what they are, how a property owner can qualify, and just a few of the many benefits they can bring.
Conservation Easements Defined
A good place to start on the road to understanding these types of easements is knowing the exact definition:
"A conservation easement is a voluntary, legal agreement that permanently limits uses of the land in order to protect its conservation values. Also known as a conservation restriction or conservation agreement, a conservation easement is one option to protect a property for future generations." - NCED
Simply speaking, it is a donation of a portion of your property for the sake of conservation. These are formed when a property owner relinquishes some rights of a portion of their property to a land trust or government agency. These agreements between a landowner and a land trust can be treated as charitable gifts, and as a result, receive significant tax benefits.
What is a Land Trust?
A land trust is a nonprofit organization where all or part of its mission is dedicated to land conservation. These trusts are the managers of conservation easements and the party in charge of ensuring the land is continuing to meet conservation requirements. Land trusts can be national organizations or managed locally.
What are the Requirements of a Conservation Easement?
When applying for a Conservation Easement, landowners can work with the land trust or agency to set rules that best work for the owner within certain guidelines. The main requirements that cannot be modified are the restriction of mining, and significant development or changes to the habitat of the land from where it began at the start of the easement. To receive tax benefits, a Conservation Easement must be created in perpetuity, meaning it will never expire.
What Are the Benefits of Conservation Easements?
There are multiple layers in benefits for both a landowner and the community through a conservation easement.
For a landowner:
The primary benefit for most landowners will typically be tax incentives. Since the tax incentive's overhaul in 2015, the tax benefits for property owners have significantly increased. Owners of land that dedicate property to conservation may treat these donations as charitable gifts. As a result, the value of the gift may deduct 50% of the owner's adjusted gross income as a nonagricultural landowner, to 100% for those who receive over half of their income from agricultural income on the land. If the value of the property exceeds the tax benefit in the first year, the tax break may continue the same schedule for the following 15 years.
The secondary benefit for landowners focuses specifically on estate planning. By dedicating a portion of land to conservation, owners can help ensure the future generations of their family will continue to be able to use land in its current state, protected from commercial development.
For the community:
Surrounding communities can benefit from conservation easements much the same way that they can benefit from development restrictions and conservation in general. Restricting the clutter of open space, maintaining scenery, maintaining agricultural heritage, and protecting the rural quality of life are just a few of the many benefits the surrounding areas experience.
Can You Continue to Use the Land?
Yes! This is where the flexibility in forming the requirements of the easement can be most helpful. Farming and ranching can continue, as well as small structures developed such as those for farming or carefully placed homes. Some areas may be deemed "forever wild" and may not be used, but this is discussed before finalizing terms and can be flexible as well.
How is the Value of a Conservation Easement Calculated?
Once the process of forming this type of easement is started, the land trust will then order an appraisal of the entire property. With the value of the property determined, the value of the easement is found by calculating the difference in value the entire property has without the designated land included.
Example: 10,000 acres is appraised at a value of $10,000,000 making each acre worth $1,000. Designating 100 acres in a conservation easement would make the new property value $9,900,000 with a conservation easement value of $100,000.
Conservation Easement Tax Benefits
It is important to note that tax codes change frequently, and for specific advice please consult with your tax accountant.
Here is a quick summary discussed above on the tax breaks outlined for landowners that dedicate land to a conservation easement:
IF YOU ARE RECEIVING LESS THAN 50% OF YOUR INCOME FROM THE LAND AS A FARMER OR RANCHER:
- Annual Deduction of up to 50% of your Adjusted Gross Income (AGI) equal to the value of the property donated.
IF YOU ARE RECEIVING OVER 50% OF YOUR INCOME FROM THE LAND AS A FARMER OR RANCHER:
Annual deduction of up to 100% of your Adjusted Gross Income (AGI) equal to the value of the property donated.
If the value of the property donated exceeds the amount deducted in the first year the deduction will continue annually until either the value is reached, or 15 additional years have passed.
HERE IS AN EXAMPLE OF WHAT THIS WOULD LOOK LIKE FOR A HYPOTHETICAL LANDOWNER:
Mr. Williams owns a property that is 10,000 acres and is worth $1,000 per acre. He has decided to dedicate 1,000 acres to a land trust as a conservation easement with an appraised value of $1,000,000. He does not make the majority of his income from agriculture on the land, but makes $100,000 a year. Here is a breakdown of what his tax incentives would potentially look like:
$100,000 x 50% = $50,000 income tax deduction in the first year. Since there is a remaining value of the easement, the $50,000 would continue on an annual basis for the following 15 years for a total deduction of $800,000 to Mr. Williams Income over 16 years.
IF MR. WILLIAMS MADE OVER 50% OF HIS INCOME FROM THE LAND AS A RANCHER OR FARMER:
$100,000 x 100% = $100,000 income tax deduction in the first year and the following 9 years until the total income tax deduction is equal to the value of the easement at $1,000,000.
Other Tax Incentives
Many states and local municipalities will go beyond the federal tax deductions and offer breaks and deductions for property taxes and other local fees. Check with your local tax authority for more details.
How to Get a Conservation Easement
The first step in getting a Conservation Easement is locating a land trust or government agency to hold the rights to the easement and discuss your unique requirements. Landtrust.org has a locator tool that makes this process simple and is specific to your area. Once you have decided on a land trust, contact them for more information on scheduling an appraisal, and outlining the terms of the easement.
For more information on Conservation Easements, or buying and selling rural property, feel free to contact us. Otherwise, continue browsing our site to see the huge selection of listings and resources LandLeader has to offer all across the United States.