The Financial Upside of Conservation Easements
June 20, 2018 in AFM News
While easements carry inherent limitations for property use, the upside potential can be significant.
By Roy Belser, Chairman of the Board
As land management consultants, we at American Forest Management are always charged to look carefully at a property, understand the landowner’s goals, look for additional revenue streams and determine the highest and best use of that land. What we try to do is ask, “How can we maximize the landowner’s objectives?” Donating or selling land as a conservation easement is one of the tools in the toolbox.
A conservation easement is a voluntary, legal agreement between a landowner and an easement holder (e.g. land trust, non-profit conservation group or government agency) that permanently limits specific uses of the land in order to protect its conservation values. The type of limits placed on the easement are decided upon by the landowner and easement holder. The limits vary widely—such as restricting development and mining, designating the property to only be used for farming and agriculture, maintaining the habitat for specific wildlife, providing scenic views, protecting water quality or preserving the property as timberland. The landowner still technically “owns” the land. They maintain traditional uses of the property while signing away specific property rights to the easement holder, who is responsible for monitoring and defending the easement if compliance issues arise.
Landowner resistance to granting a conservation easement usually comes down to a reluctance to put a permanent encumbrance thereby limiting use on the property without a counterbalancing incentive to do so. Frequently, the landowner is simply unaware of the financial incentives available. While easements carry permanent limitations for property use, the upside potential can be significant.
For some landowners, conservation easements are the ultimate property right because they can determine the future of the property forever. It represents leaving a lifetime legacy—and for some, that is reason enough to do it. However, landowners can also generate income, keep large parcels of land intact, and possibly reduce their taxes.
Most conservation easements are donated, but a landowner may be able to sell a conservation easement to land trusts, conservation groups, or other non-profit government agencies. A number of federal, state and local programs provide funding through conservation “banks” for purchasing such easements. Landowners should check with their local land trust (FindALandTrust.org) or conservation groups to see if such funding is available, and how to apply.
Whether an easement is donated or sold (as a “bargain sale”), the landowner could qualify for federal or state tax incentives and reduced local property taxes; but it is important to keep in mind that to qualify for any tax benefits, the easement must provide some kind of public benefit, such as water quality, wildlife habitat, preservation of wetlands, farm/ranch, or historic properties, and outdoor recreation to name a few.
An easement could lower a landowner’s federal income tax because the value of that property can be claimed as a tax-deductible charitable donation. Of course, the amount of the deduction depends upon the value assigned to the land, which is based on a conservation easement appraisal. It is recommended to get an appraisal prior to developing an easement to ensure there is value. This type of valuation is essentially the difference between two appraisals—one appraisal of the value of the property in its current (unencumbered) state, and the other an appraisal of the property in its proposed restricted state. Easements that are not donated will not qualify for tax benefits unless they are sold as a “bargain sale”, in which landowners sell a portion of the easement (cash compensation) and donate the remaining portion (tax incentive compensation).
On the federal level, Congress enacted legislation in 2015 which significantly enhanced tax incentives for Conservation Easement Donations. The basics are these:
- The deduction a donor can take for donating a conservation easement was raised to 50% from 30% of his/her annual income;
- The carry-forward period for a donor to take a deduction for a conservation easement was extended to 15 years from 5 years; and
- Qualified farmers and ranchers can now deduct up to 100% of their income, from 50% previously.
There are roughly a dozen states across the country that offer state-level tax benefits for conservation easement donations or sales. The specifics of such benefits vary by state. For example, in some states landowners are exempt from state income tax on the proceeds generated from the sale of the easement. In several states, property tax bills are lowered if the easement removes valuable development rights and thus the property is assessed at a lower value.
Some states have conservation “banks” in place to buy easements or provide funding to conservation entities to purchase them. South Carolina is one of those states, I worked with several landowners to apply for some of this funding (see Examples A, B and C). The amount of such funds varies widely by the few states that do this. South Carolina usually has around $9 - $10 million in available funds per year, whereas states like Texas have over $25 million.
Additionally, many states offer tax credits to landowners who convey conservation easements. According to the Land Trust Alliance, Virginia, Colorado, Georgia, South Carolina and New Mexico offer transferable tax credits. These provide even more financial upside to the landowner. For example, in South Carolina the landowner can receive up to $250 in tax credits per acre for every $1,000 of value they give up in conservation easement. Sometimes this results in an amount of tax credit the landowner couldn’t possibly use in the number of years allowed by the state tax law or doesn’t have taxable income in South Carolina (such as a non-resident). However, unlike tax deductions, these tax credits are transferable and there is a market for them. There are entities that are set up to accept them, and they can also be sold to another individual. Usually the selling price is around $0.70 on the dollar.
Nine other states offer some form of non-transferable income tax credit. They are Arkansas, California, Connecticut, Delaware, Iowa, Maryland, Massachusetts, Mississippi and New York.
Despite all of these potential financial upsides, a very small percentage of the acreage we manage for clients have conservation easements on them today. Because of the legislation enacted in 2015 and funding by conservation banks, conservation easements are becoming more popular across the country due to the enhanced financial incentives to do so.
Essentially the decision comes down to whether a landowner wants to restrict certain activity and doesn’t mind placing such restrictions on his or her land in perpetuity, and/or is looking for ways to generate income (or tax savings) from their property. Regardless, conservation easements are a tool worth considering.