A conservation easement is the voluntary process of placing restrictive covenants on certain (or all) portions of a person, (or qualified entity i.e. partnership, LLC, S or C Corp.) property, in perpetuity in the hands of a qualified 501C-3 land trust or other qualified government entity for the purpose of obtaining a charitable tax deduction.
The United States Government passed legislation, codified at 26 CFR-1.170-14, allowing taxpayers to obtain federal tax deductions on the value of a qualified conservation contribution to a qualified organization. The tax deduction is for an individual only and must be passed through the legal entity to the personal tax payer. The conservation easement provides for the following: retirement of the property from specific uses, i.e. residential development, commercial development or industrial development. The property does not change hands, the land owner does not relinquish his ownership in the property, it merely reduces the tax basis the land. The property owner retains all of the rights remaining to him after the placement of the easement. A conservation easement is a negative document in that it states the things that the property owner can not do rather than the things he can do. He gives up the right to do certain things in exchange for the present value of the tax deduction.
What type of land qualifies?
In general, most any land that has a higher value other than what is is being presently used for qualifies. This would include land that is currently vacant and could be developed, a farm, timberland, or low density housing in a high density housing market. In order for land to be qualified for the placement of an easement it must have an established and definable conservation purpose. In order to be able to place an easement on a piece of property the development potential must meet certain requirements.
First and foremost, it must be feasible to develop the land to the projected use. Examples of land that do not qualify would be: land located within the flood way of a creek or river (flood plain land is OK), land that is too severe to develop, land that already has restrictions placed on it, land located in a zoning classification that does not allow additional density to be used. The land must be owned fee simple by the owner wishing to place the easement for a period of at least one year prior to the placement of the easement.
Who can use a conservation easement?
The key to determining who can use the benefits of the tax deduction is the key to the whole process. Since the easement generates a non-cash charitable tax deduction, it is limited to the 50% rule by the IRS that the amount that can be deducted is limited to 50% *of the adjusted gross income (AGI) of the individual per year. The tax deduction can be used in the year it is placed and has a carry forward of fifteen years . The tax payer should have and AGI of sufficient value over the fifteen year period in order to take full advantage of the deduction generated by a conservation easement. The deduction may be used to decrease the taxpayer’s adjusted gross income and the deduction does not contribute to or trigger the alternative minimum tax.
How does the process work?
We prepare a baseline biological study to determine the conservation purpose. The basic premise for the easement process assumes that their is a higher and better use for the property than it is currently being used for. For example, open land could be used to build single family and multi family housing thus generating a greater value for the land owner. A farm could be used for timber production, a piece of property could be used as a mobile home park, it could also be used for commercial or industrial purposes. The easement process makes assumptions based on the potential of the property.
All of these assumptions are backed up by professional opinions and documentation. We determine what the highest and best use of the land wold be based on these assumptions. After that determination is made, we then prepare a yield plan that will give us the economic numbers on which to base the value of the easement. This yield plan is then given to a “qualified conservation easement appraiser” for him to quantify and qualify the values of the yield plan. From his appraisal value we can then deduct certain items required by the IRS. these items include; sales and marketing expenses, entrepreneurial profit plus direct development costs for the lots. This appraised value is the net, discounted to net present value, of the easement. Once the land is placed under the restrictions of the easement its residual value is reduced. Again, by appraisal, we determine the residual value after the easement is in place and the difference between these two values is the amount of the charitable tax deduction that is available to the individual tax payer. The tax payer is then supplied with an IRS 8283 charitable tax deduction form signed by the land trust and the appraiser for his financial advisors to apply.