A conservation easement is a unique legal agreement that offers advantages to large landowners. Depending on your needs and goals, you can set up a conservation easement to:
- Protect open space or critical habitat on your land from encroaching development.
- Preserve the agricultural value and traditional uses of your land through continued farming, ranching and timber harvesting.
- Safeguard a historically or culturally important building or area on your property.
- Conserve land that has significant scenic, biodiversity or other value for the outdoor recreation or education of the public.
Whether you place all or only part of your property into a conservation easement, you can expect to benefit from the agreement in several ways.
What is a conservation easement?
A conservation easement is a voluntary legal agreement between a landowner and a land trust or government agency.
It permanently limits uses of the land in order to protect its conservation values. Landowners retain many of their rights, including the right to own and use the land, sell it, and pass it on to their heirs.
Conservation easements do offer private landowners flexibility in protecting their land, though most of these are trade-offs. For example, a landowner who donates their property can retain the right to grow crops on a parcel while at the same time relinquishing the right to build additional structures on the parcel.
What are the tax benefits of a conservation easement?
Conservation easements mean the landowner gives up the right to make certain changes to the property to preserve it for future generations. While each easement is unique, it usually limits the usefulness of the property, and this lowers its value.
The IRS provides a tax deduction based on value reduction if certain conditions are met. A property owner can create a deductible conservation easement through donation.
IRS criteria for a deduction based on value reduction
If a conservation easement meets IRS criteria, the owner can qualify for a tax deduction that is based on the reduction in property value.
There are four types of conservation easements that can qualify for this tax deduction:
- Those that protect natural habitats for fish, wildlife or plants.
- Easements that preserve land for public recreational or educational use.
- Those that preserve open space, or undeveloped land.
- Easements that preserve land or certified historic structures.
From 2006 to 2014, a tax incentive boosted the allowable deduction for conservation easements to 50% of AGI, or 100% for certain ranchers and farmers. This original incentive expired at the end of 2014 but has been restored and made permanent by legislation passed in 2015.
Deductions for donation
A property owner can create a deductible conservation easement by donating some or all property rights to a qualified non-profit. For example, the owner of a historic building might give a local architectural preservation society final approval of any proposed change to the building’s exterior.
- If donated to a nonprofit organization, the landowner can deduct from their federal taxes the difference in the value of the land before the easement was created and after the easement was created.
When landowners donate a conservation easement, they give up part of the value of their property, so it’s a major decision. Tax incentives offset some of that loss in value.
- Virginia allows landowners to take a tax credit equal to up to 40% of the value of their donation of a conservation easement. Because these tax credits can in some cases be so large that someone couldn’t use them within their lifetime, sometimes people sell the tax credits.
For a conservation easement to be eligible for a tax deduction, the property rights must be donated for conservation purposes to what the tax code calls a “qualified conservation organization.” These can include:
- Governmental units.
- Some other tax-exempt groups.
The organization receiving the easement must have the resources to enforce all restrictions and demonstrate it is committed to enforcement.
The current property owner is bound by the easement as well as all future owners of the property and any lenders who use the property as collateral. The conservation purpose must be protected in perpetuity.
To ensure this, easements must be written into public records.
Figuring out the fair market value for a conservation easement can be extremely difficult, but a formal appraisal is required for any tax deduction.
Other tax savings
There are other tax savings those with a conservation easement can take advantage of, including:
- Estate tax. Heirs can exclude 40% of the value of land under conservation easement from estate taxes.
- Property tax. By lowering your land’s value, a conservation easement can also lower your property taxes.