Farm and Forest Land Preservation with Conservation Easements

Farm and Forest Land Farm and Forest Land Preservation with Preservation with

Conservation Conservation EasementsEasements

Topics to be CoveredTopics to be Covered

What is a conservation easement?What is a conservation easement?What is a land trust and how do they relate What is a land trust and how do they relate to conservation easements?to conservation easements?What sorts of restrictions do conservation What sorts of restrictions do conservation easements place on landowners?easements place on landowners?How can conservation easements benefit How can conservation easements benefit landowners?landowners?What is involved in creating a conservation What is involved in creating a conservation easement?easement?

Fine PrintFine Print

This presentation provides basic This presentation provides basic information on conservation easements.information on conservation easements.

Anyone involved in granting a Anyone involved in granting a conservation easement should contact conservation easement should contact qualified professionals for legal and qualified professionals for legal and financial planning assistance.financial planning assistance.

Property OwnershipProperty OwnershipProperty ownership is a collection of Property ownership is a collection of individual rightsindividual rights

This collection of rights is often compared to This collection of rights is often compared to a “bundle of sticks” because individual a “bundle of sticks” because individual rights can be removed from the collection rights can be removed from the collection just as a stick can be removed from the just as a stick can be removed from the bundlebundle

Examples of Property Rights Examples of Property Rights TransfersTransfers

Lease – right to exclusive possessionLease – right to exclusive possession

Easement – right to useEasement – right to use

ZoningZoning

Deed with restrictions - retention of rightsDeed with restrictions - retention of rights

Conservation easementConservation easement

What is a conservation easement?What is a conservation easement?

Legal, voluntary agreement between a Legal, voluntary agreement between a landowner and a land trust or government landowner and a land trust or government agency that restricts the development or agency that restricts the development or use of propertyuse of property In effect, conservation easements remove the In effect, conservation easements remove the

right to develop the property from the right to develop the property from the landowner’s “bundle of sticks”landowner’s “bundle of sticks”

Conservation easements “run with the land” - Conservation easements “run with the land” - they bind both current and future landownersthey bind both current and future landowners

Conservation EasementsConservation EasementsLand trusts and government agencies can Land trusts and government agencies can leverage resources by only acquiring the leverage resources by only acquiring the rights relevant to their goals.rights relevant to their goals.

Landowners retain all other rights.Landowners retain all other rights.

What is a land trust?What is a land trust?

A non-profit organization that holds land A non-profit organization that holds land and/or the rights to enforce the provisions and/or the rights to enforce the provisions of conservation easements “in trust” for of conservation easements “in trust” for the public goodthe public good

How can conservation How can conservation easements benefit landowners?easements benefit landowners?

Preserve desired land uses into the futurePreserve desired land uses into the future

Allow continued use of the landAllow continued use of the land

Potential source of incomePotential source of income

Possible tax benefitsPossible tax benefits Property TaxesProperty Taxes Income TaxesIncome Taxes Estate TaxesEstate Taxes

Conservation EasementsConservation Easementsas a Possible Source of Incomeas a Possible Source of Income

Some land trusts and government Some land trusts and government agencies can pay full value for the rights agencies can pay full value for the rights extinguished in a conservation easementextinguished in a conservation easement

More often, they are only able to acquire More often, they are only able to acquire these rights through either a “bargain sale” these rights through either a “bargain sale” (below fair market value) or a donation(below fair market value) or a donation

Property Tax Benefits Property Tax Benefits

Conservation easements often decrease Conservation easements often decrease the value of property because they the value of property because they foreclose the possibility of future foreclose the possibility of future developmentdevelopment Difference can be dramaticDifference can be dramatic Potential savings are often reduced if the land Potential savings are often reduced if the land

is already being assessed for its currentis already being assessed for its current use use and not fair market valueand not fair market value

Income Tax BenefitsIncome Tax Benefits

Donation or bargain sale may qualify as a Donation or bargain sale may qualify as a charitable donation for federal and state charitable donation for federal and state income taxesincome taxes

To qualify for federal income tax benefits, To qualify for federal income tax benefits, a conservation easement must meet a conservation easement must meet certain requirements specified in Section certain requirements specified in Section 170 of the Internal Revenue Code170 of the Internal Revenue Code

http://www.irs.gov/taxpros/article/0,,id=98137,00.html

Estate Tax BenefitsEstate Tax Benefits

Conservation easements reduce value of Conservation easements reduce value of an estate just as they reduce the value of an estate just as they reduce the value of the property for property tax purposesthe property for property tax purposes

If the easement reduces the value of the If the easement reduces the value of the property by at least 30% it may also property by at least 30% it may also qualify for additional estate tax benefits qualify for additional estate tax benefits under Section 1031 of the Internal under Section 1031 of the Internal Revenue CodeRevenue Code

Steps Involved in Granting a Steps Involved in Granting a Conservation EasementConservation Easement

Locate a receiving entityLocate a receiving entity

Compile a baseline inventoryCompile a baseline inventory

Negotiate and draft the terms of the Negotiate and draft the terms of the conservation easementconservation easement

Execute and record the documentsExecute and record the documents

Get the property appraised Get the property appraised


Locate a receiving entityLocate a receiving entity Must be a “qualified organization” for income Must be a “qualified organization” for income

and estate tax purposesand estate tax purposes Compatible and stable partnerCompatible and stable partner Must be willing to purchase or accept a Must be willing to purchase or accept a

donation of the conservation easementdonation of the conservation easementTypical factors considered include current use, size Typical factors considered include current use, size and location of the property and costs of acquiring, and location of the property and costs of acquiring, monitoring and enforcing the conservation monitoring and enforcing the conservation easementeasement


Compile a baseline inventoryCompile a baseline inventory Establishes a reference point for Establishes a reference point for

determining compliance with the terms determining compliance with the terms of the conservation easementof the conservation easement

IncludesIncludesTitle searchTitle searchSurvey of the property (may not be needed)Survey of the property (may not be needed)Description of current uses of the propertyDescription of current uses of the propertyDescription of resources that the easement is Description of resources that the easement is designed to protectdesigned to protect


Negotiate terms Negotiate terms

For working lands, landowner should seek not only For working lands, landowner should seek not only

to retain rights for current uses, but also the to retain rights for current uses, but also the flexibility to allow future changes in operationsflexibility to allow future changes in operations

Receiving entity will seek meaningful and Receiving entity will seek meaningful and enforceable restrictions relevant to its mission enforceable restrictions relevant to its mission

Other Landowner ConsiderationsOther Landowner Considerations

Future borrowing powerFuture borrowing power

Impacts of increasing property valuesImpacts of increasing property values

Conditions under which the terms of Conditions under which the terms of the conservation easement can be the conservation easement can be modified or invalidatedmodified or invalidated


Execute and record the documentsExecute and record the documents Conservation easements must be executed Conservation easements must be executed

by all current owners of the propertyby all current owners of the property The holders of any mortgage or deed of trust The holders of any mortgage or deed of trust

must consent in writing to the easement and must consent in writing to the easement and the consent must also be recordedthe consent must also be recorded

Its also prudent to inform others with Its also prudent to inform others with interests in the property interests in the property

Conservation easements are publicly Conservation easements are publicly recorded with other land recordsrecorded with other land records


Obtain an appraisal of the propertyObtain an appraisal of the property Needed to qualify for certain tax benefitsNeeded to qualify for certain tax benefits

ConclusionConclusion

Conservation easements are an attractive Conservation easements are an attractive way to preserve current land usesway to preserve current land usesConservation easements may have other Conservation easements may have other significant benefits for landownerssignificant benefits for landownersConservation easements are legally Conservation easements are legally binding agreements that should not be binding agreements that should not be entered into without great care and entered into without great care and thoughtthought Especially true for working landsEspecially true for working lands

For additional information see For additional information see Farm and Farm and Forest Land Preservation with Conservation Forest Land Preservation with Conservation EasementsEasements available online at available online at http://srwqis.tamu.edu/program-ruralurbaninterface.aspx

Comments or Comments or Questions?Questions?

This presentation is produced by the Southern Regional Water Program with support by the Cooperative State Research, Education, and Extension Service, U.S. Department of Agriculture, National Water Program, under Agreement No. 2004-51130-03114. Any opinions, findings, conclusions, or recommendations expressed in this presentation are those of the author(s) and do not necessarily reflect the view of the U.S. Department of Agriculture.

Federal Income TaxFederal Income Tax

Sale For Less Than Fair Market Sale For Less Than Fair Market Value of the Easement to a Value of the Easement to a ‘Qualified Organization’ is ‘Qualified Organization’ is

DeductibleDeductible

Deduction = Fair Market Value Deduction = Fair Market Value Minus Sales Price.Minus Sales Price.

Deduction Limited to 30% of Deduction Limited to 30% of Person’s Adjusted Gross Person’s Adjusted Gross Income (10% For Income (10% For Corporations).Corporations).

Any Excess Can Be Used For Any Excess Can Be Used For Up To Five More Years.Up To Five More Years.

FEDERAL INCOME TAXFEDERAL INCOME TAX

DEDUCTION INCREASED FOR DEDUCTION INCREASED FOR EASEMENTS MADE FROM EASEMENTS MADE FROM

1/1/06 THRU 12/31/071/1/06 THRU 12/31/07

FEDERAL INCOME TAXFEDERAL INCOME TAXDEDUCTION LIMIT RAISED FROM 30% DEDUCTION LIMIT RAISED FROM 30% TO 50% ADJUSTED GROSS INCOME TO 50% ADJUSTED GROSS INCOME

LIMIT RAISED TO 100% AGI FOR LIMIT RAISED TO 100% AGI FOR “QUALIFIED” LANDOWNERS“QUALIFIED” LANDOWNERS

CARRY-FORWARD PERIOD EXTENDED CARRY-FORWARD PERIOD EXTENDED FROM 5 TO 15 YEARSFROM 5 TO 15 YEARS

““QUALIFIED”QUALIFIED”MORE THAN 50% GROSS INCOME MORE THAN 50% GROSS INCOME FROM FARMING.FROM FARMING.

‘‘AGRICULTURAL’ LANDAGRICULTURAL’ LAND

REMAINS AVAILABLE FOR AG USE REMAINS AVAILABLE FOR AG USE UNDER THE EASEMENTUNDER THE EASEMENT

CAN BE AN INDIVIDUAL OR CAN BE AN INDIVIDUAL OR CORPORATIONCORPORATION

For More InformationFor More Information

IRS WebsiteIRS Websitehttp://www.irs.gov/publications/index.html

This presentation is produced by the Southern Regional Water Program with support by the Cooperative State Research, Education, and Extension Service, U.S. Department of Agriculture, National Water Program, under Agreement No. 2004-51130-03114. Any opinions, findings, conclusions, or recommendations expressed in this presentation are those of the author(s) and do not necessarily reflect the view of the U.S. Department of Agriculture.

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Farm and Forest Land Preservation with Conservation Easements