A conservation easement is the most widely used way to permanently protect family lands because it restricts future development. By registered deed, most or all rights to develop the land for residential or commercial purposes are given up. The conservation easement deed assigns the right and obligation to enforce the restriction to a non-profit land trust or public agency. Private ownership is maintained and the land continues to be owned and managed by the donor family or successors within guidelines mutually agreed upon by the donor and donee. Management activities and considerations usually addressed in broad guidelines include agriculture, forestry, and recreation. Public access and use of the property may be limited. The right to post the land is usually retained by the landowner. The landowner retains the obligation to pay property taxes and the right to sell the land, but the development restrictions spelled out in the conservation easement deed run with the property deed in perpetuity. Deed review by an attorney is strongly recommended.
Often times the motivation behind granting a conservation easement may simply be love for the land, water, and wildlife, and the donor may gain no monetary advantage. However, sometimes there can be significant tax benefits.
Federal Income Tax:
When there is a recognized public benefit, such as protection of scenic qualities, natural resources, water, and wildlife, the landowner may be eligible for an income tax deduction.
The value of the easement, the amount deductible, must be determined by a qualified real estate appraiser. The appraiser is hired to calculate that value by determining the difference between the market value of the property without restrictions and the market value after development rights are given up by the conservation deed.
The donor generally can take that value as an income tax deduction up to an amount equal to thirty per cent of the donor's income. If the value is too large for the landowner to use in the year of the easement gift, the unused deduction value can be "carried forward" for up to five years following the gift. Advice from an accountant is recommended.
Federal Estate Tax:
There is no tax liability for what is willed to a spouse. However, there is a limit ("unified credit") to what can otherwise be willed or given exempt from tax. That unified credit, the sum of the value of all assets, is $2,000,000. That is a substantial amount, but the tax on the remainder not exempt can be very high, forty-five to fifty percent! There are many "horror stories" of heirs having to sell "the family farm" or the "lodge on the lake," etc. because that tax requires a cash payment, generally nine months after death. (Note: The $2,000,000 exemption ends in 2010 unless re-established, and in 2012 the exemption reverts to $600,000).
A conservation easement can be a very useful tool for reducing or eliminating the estate tax because it reduces the market value of the land, hence the total value of the estate. The "horror stories" can instead have happy endings with heirs receiving "the family place" protected by easement and with inheritance tax eliminated or much reduced.
In many cases, if the land is protected by a conservation easement, an additional forty percent of the land value, already reduced by the easement, may be excluded from the estate tax base up to a maximum of $500,000 for this additional forty percent exclusion.
A landowner may gain all the above estate tax savings, but not the income tax deduction, by gifting a conservation easement in the will itself. Or, heirs may gain these savings post mortem by gifting a conservation easement by recorded deed prior to the due date for the estate tax return (nine months after death, with a six-month extension generally available by official request to the IRS).
The property tax is not directly affected by a conservation easement, but rather it is lowered by enrolling ten acres or more undeveloped land in the New Hampshire state current use program. However, parcels under the ten acre minimum, which have significant value for conservation, such as a scenic point on a great pond, when protected by conservation easement, are eligible for the current use tax rate despite being under the ten acre lower limit.
One Final Note - A conservation easement ensures that the land will always be eligible for reduced property tax rate even if the current use program is abolished.
(from article written by Meade Cadot and published by the Harris Center for Conservation Education in Hancock, New Hampshire.)
For more information visit www.harriscenter.org.