Jocelyn and Mike Brown own two hundred acres of land overlooking a beautiful ski town with a mountain range in the background. Jocelyn and Mike have five children and 18 grandchildren. None of the children or grandchildren have the financial resources to buy the land outright so that the equity can be evenly divided amongst the five families upon the Browns’ death. Jocelyn and Mike do not want their property sold to the local ski resort, as the resort owners will develop it and ruin the view for the neighbors whose property sits behind the Browns. Jocelyn and Mike are considering a conservation easement. A conservation easement will preserve the land for the enjoyment of all, provide tax benefits for the Browns or their beneficiaries, and allow the Browns to use the property and pass it on to their heirs for them to enjoy.1
The public and the environment benefit from the Browns’ land
The Browns can create a conservation easement agreement or servitude with a government agency or land trust. Land trusts range in size from national organizations to small grassroots groups.1 The Browns choose Blakely Reserve, a charitable organization and land trust that preserves land for scientists and students to study plants and wildlife. This organization’s ideals closely align with the Brown’s values, encouraging education, preserving the neighbors’ view, and having people hike and actively enjoy the land. The conservation easement will give Blakely Reserve the right and duty to preserve and protect the land for the public benefit and use while still allowing the Browns to reserve ten acres for their personal use.
The altruistic desire to protect the land for generations to come provides environmental and societal benefits for everyone. In exchange, the Browns can enjoy significant tax benefits and ensure that their family will still be able to enjoy the land as well. Congress has determined that landowners should be incentivized to engage in preservation efforts, especially when they benefit the public.
The Browns also benefit from their land
The federal tax code would allow the Browns to take a charitable income tax deduction of up to 50 percent of their contribution base for the taxable year. The contribution base is the adjusted gross income minus net operating loss carryback. A large donation, such as the Browns, can have a surplus contribution, which remains subject to the same limitations on the donor’s contribution base, and can be carried over for up to fifteen years.
If the Browns farmed their land or were ranchers, they could deduct up to 100 percent of their charitable contribution base. Limited liability companies, partnerships, and subchapter S corporations, as pass-through entities, can also take advantage of the tax deductions from conservation easements.
State requirements and benefits may vary, so it is essential to check with your tax advisor to determine which tax benefits are available to you in your state.
The Browns’ estate could benefit from their land
If the Browns did not want to donate the conservation agreement during their lifetime, they could do so at their death as part of their estate plan. This plan would allow their children and grandchildren to benefit from the estate tax benefits. Donating the land to Blakely Reserve would decrease the sales value of the land significantly. The federal tax code allows the estate to have a tax benefit due to the decrease in land value.
Key Points about Conservation Easements
Enlisting your attorney’s help can help you determine whether a conservation easement is the best strategy if you want to preserve the natural state of your land, benefit the public, and reserve some rights to your property while receiving financial benefits. Conservation easements must be properly created in order to fulfill the requirements of the Internal Revenue Service and therefore take advantage of tax benefits. Key points in forming a conservation easement include:
- Federal tax regulations spell out which organizations qualify as qualified conservation organizations.
- The organization must have the resources and the desire to enforce the restrictions put on the land through the easement. Maintaining the land has costs that the organization must be able and willing to shoulder.
- The agreement must be written to last forever.
- The conservation easement must be recorded in the local land records, so future investors are aware of its existence.
- A qualified appraiser must be used to determine the original value of the land and the value after the conservation easement. The IRS has noted attempts to game the system to increase tax benefits. Appraisals should be justified with thorough documentation.
In summary, a conservation easement is a voluntary, legal agreement made with a land trust or government agency for conservation purposes. These property donations provide public benefits but do not automatically make properties open to the public. The land is still privately owned, and a landowner may retain many property rights.
If you feel that a conservation easement is a strategy that would make sense as part of your estate or tax plan, please contact us.
Takagi, G. (2005). Percentage limitations on the charitable contribution deduction. Retrieved from nonprofitlawblog.com/charitable_givi_1