02-Jun-2005

Tax consequences of Conservation easements

There are several benefits available to a landowner who donates a conservation to a qualified organization. These benefits are:

(1) A charitable income tax deduction equal to the value of the donated easement;
(2) A reduction in the value of the land subject to the easement included in the landowner’s estate for estate tax purposes;
(3) An exclusion up to 40% of the value of the land (but not improvements) subject to the easement from the landowner’s estate for estate tax purposes (successive generations in a single family will be entitled to the benefit of the exclusion where the land subject to the easement is passed down from generation to generation);
(4) A possible reduction in annual local real property taxes, as determined by the local tax assessor.

The charitable income tax deduction generated by the donation of a conservation easement is equal to the fair market value of the easement at the time of the donation. Usually no substantial record of sales of comparable easements exists which a fair market value can be determined. Accordingly, the fair market value of an easement generally should be equal to the difference between the fair market value of the property subject to the easement before the donation, and the fair market value of the property after the donation. This number is arrived at by a qualified appraisal of the property.

There are certain limitations on claiming the charitable income tax deduction, as well as other requirements that the landowner must meet in order to qualify for the multiple tax benefits afforded by the donation of a conservation easement.

There are, however, drawbacks to placing a conservation easement on property. A landowner’s intended use of the property may include wide-scale development or subdivision for commercial or residential use, both of which will be prohibited. A conservation easement will significantly reduce the marketability of property to developers.

In summary, a conservation easement is a useful tool for many reasons. However, it is a decision that the landowner should consider very carefully. They are deed restrictions and are not easily removed.