If you ask conservation easement expert and tax attorney Stephen J. Small why people choose to place conservation easements on their land, he will give you the same answer every time. They love their land, they love their land and they love their land! While some may be impressed by the possible tax deductions, most just want to see their land protected and leave a legacy of sorts for future generations.
Private conservation is critical to achieving both NYS and the nation’s goal of protecting 30% of our lands and waters by 2030. To do our part in achieving this important goal, the Land Alliance put together our own 30 x 30 Community Conservation campaign. We have identified more than 8,000 acres of conservation worthy land in our community that may be eligible for private conservation.
Thus far, the Land Alliance has notified over 250 residents in 12 villages about the conservation value of their land. We think it would be useful to give our members a brief explanation of conservation easements. They are one of the best ways to protect our land and water and options you or a family member might want to consider.
Landowners who wish to protect their land for its scenic, historic and/or natural qualities can use a conservation easement to restrict the type, amount and location of future development. The easement agreement is private and voluntary. It is a more permanent way to protect land than relying on existing government regulations such as zoning and critical environmental area designations. A conservation easement can be an essential tool for passing land to the next generation. By removing the land’s development potential, the easement lowers its market value, which in turn lowers the estate tax. This can make a difference in an heir’s ability to keep the land intact. A qualified conservation easement may also be eligible for a significant federal tax deduction.
What is a Conservation Easement?
A conservation easement is a voluntary legal agreement to preserve land in perpetuity. The easement agreement spells out a landowner’s commitment to protect the existing conservation values of some or all of their property by restricting specific development and future use. With an easement in place, the landowner still owns and controls the property, with only the specific uses/rights that protect the encumbered area as restrictions. A landowner may sell the land, but the conservation restrictions will remain in place forever. A conservation easement may be held only by a qualified land trust or governmental entity. It does not give the public any rights to the land unless the landowner decides to include such rights in the easement.
How to Place a Conservation Easement
There are several steps in creating a conservation easement. In our community, they begin with a landowner’s discussing their intent to preserve their land with the Land Alliance. As a preliminary step, our team will visit the property to evaluate the potential easement’s conservation value and discuss the landowner’s goals. If it makes sense, the next step is for the Land Alliance’s Board of Trustees to approve the project. Assuming Board approval, an outline of the remaining process is as follows:
1. Landowners should discuss the transaction with their advisors.
The Land Alliance facilitates the transaction, but the landowner retains their own advisors, such as an attorney, accountant, appraiser and surveyor.
The Land Alliance is not allowed to give tax or legal advice, although we can provide a donor with potential scenarios for both Federal and State tax benefits.
2. Once the landowner and the Land Alliance have reached an agreement, the landowner and/or their counsel should do the following:
Find an accurate survey of the property or hire a surveyor to make one. An accurate survey will be important for the appraiser to determine the metes and bounds of the land to be conserved.
Retain a qualified appraiser to determine the current market value of the land and the value after the easement is placed. Under IRS regulations an appraisal must occur no earlier than 60 days prior to the date of the contribution of the easement and no later than the due date of the income tax return on which a deduction for the gift is first claimed or reported.
Initiate a title search to ensure there are no encumbrances on the donor’s land. The landowner’s attorney or the Land Alliance can initiate a title search. Any mortgage on the property must be subordinated to the conservation easement so that the provisions of the conservation easement cannot be eliminated if the mortgage is foreclosed.
3. Preparation of the first draft of the conservation easement agreement.
The Land Alliance or the donor’s counsel may prepare the draft conservation easement. The Land Alliance will prepare baseline documentation. Baseline documentation includes boundaries, important natural resources, structures, clear descriptions of reserved rights and prohibited uses. The baseline establishes the ecological value and condition of the property at the time of the gift and becomes an exhibit to the conservation easement. It is required by tax law. The landowner will sign this document at closing.
4. Once the terms of the easement are agreed to, the landowner must provide the Land Alliance with copies of an appraisal and survey.
The Land Alliance will provide the landowner with a copy of the baseline for their review. Once all documents have been agreed upon a formal closing will be scheduled.
5. After the signing and recording of the conservation easement the Land Alliance begins its stewardship program.
A trained member of the Land Alliance staff will visit the property at least once each year and document that the terms of the easement are being upheld.
The Land Alliance is required by law to have the resources necessary to uphold the terms of the conservation easement restrictions. We generally ask the donor to make a one-time, voluntary contribution to the long-term stewardship of the property. On average, the amount is $10,000, but amounts may vary depending on the size and complexity of the easement.
6. After closing, the easement agreement will be recorded with the appropriate governmental agencies. If the landowner intends to seek tax benefits, they must file necessary tax forms.
The person making the contribution must file an IRS Form 8283, Non-Cash Charitable Contributions, along with their tax return for the year in which the gift was made and together with a copy of the appraisal dated no earlier than 60 days prior to the date of the contribution.
Both the Land Alliance and the appraiser must sign the IRS Form 8283.
In order to ensure the accurate representation of the value of gifts, the Land Alliance will not sign the IRS Form 8283 if it has reservations about the stated value of the donation.
We hope this brief explanation of conservation easements and the process of creating such is helpful in your consideration of ways to protect our natural areas while keeping land in private hands. For further questions please contact the Land Alliance and we would be pleased to provide more detail.
Federal Income Tax Benefit Scenario
Federal Income Tax Benefits
Assume a landowner has a 10-acre property in a village that is zoned for 2-acre subdivision. The owner chooses to place a conservation easement on the vacant 8-acre parcel. The parcel has conservation value because it is in the middle of the special groundwater protection area (as designated by the State of New York) and is immediately adjacent to already preserved parkland.
Two appraised values must be determined:
The current value of the entire property (existing fair market value) = $5,000,000
The value of the property after the easement is in place = $1,000,000
The value of the conservation easement = $4,000,000 (the difference between 1. and 2.)
Under current law, there is a federal tax deduction for donating a conservation easement. Under the enhanced conservation easement incentive, the donor is allowed to deduct the entire conservation easement value, up to 50% of the landowner’s adjusted gross income, from federal income tax in a given year, and can carry forward any remaining deduction for a total of 16 years.
A simplified example follows:
Conservation Easement Value = $4,000,000
Landowner/Donor’s AGI = $500,000
50% of AGI =$250,000
Under the existing conservation easement incentive, a donor is able to deduct $250,000 of the $4,000,000 conservation easement value the year of donation and will be able to carry forward the remaining deduction of $3,750,000 over an additional fifteen years. Assuming the donor’s AGI stays the same over the next 15 years, the donor would continue to be able to take $250,000 in deductions each subsequent year which, in this example, generates the full value of the easement donation.