How to Protect Your Land and Reduce Your Taxes
A conservation easement deed is a contract by which a landowner conveys the development rights of the land to a land trust or government agency. A conservation easement lasts forever and is a way to conserve open space, farmland, scenic views, and other natural resources. After a conservation easement is conveyed to a land trust, for example, the landowner continues to own the land.
A conservation easement deed is a negotiated document, by which I mean that a landowner and land trust reach an agreement about what uses will be allowed and not allowed on the property. More often than not, the landowner continues to use the land in much the same way as prior to the easement. The conservation easement deed will almost always require that the easement holder (i.e., the land trust or government agency) regularly monitor the property to ensure that the terms of the easement are being followed and that no one, such as a neighbor who builds a shed over the property line, is violating the easement.
Conservation easements may be sold or donated. If a landowner donates a conservation easement, the landowner may be eligible to claim a significant income tax deduction. Whether you intend to claim a tax deduction is something that you should determine early in the process. In some circumstances, though, a landowner is simply not eligible for a tax deduction. For example, if you offer a conservation easement to the zoning board in exchange for a variance, that is a non-deductible quid pro quo rather than a charitable donation.
If you are going to pursue a charitable deduction, you must carefully pay attention to the IRS’s requirements. Make sure that the land trust or other entity to which you are giving the easement is a “qualified” organization under the Internal Revenue Code. Most transactions in New Hampshire involving conservation easements involve qualified organizations. Regional examples of qualified organizations include the Monadnock Conservancy, the Harris Center, and the Piscataquog Land Conservancy. Land trusts conserving land in one specific town will likely qualify, but make sure.
To claim a charitable deduction, you will almost certainly need to have a baseline study prepared by a biologist or other naturalist. The baseline study documents the condition of the property at the time of the donation so that future conditions of the property can be compared to what the property was like at the time of donation. The baseline must be completed prior to donating the conservation easement.
You will need a contemporaneous written acknowledgement from the land trust that states the amount of the gift, describes the donated gift, and satisfies other IRS requirements.
A “qualified” appraiser must conduct a “qualified” appraisal of the value of the donated conservation easement. Not all real estate appraisers are qualified, so you need to ensure that yours is. The appraisal must be done not more than 60 days prior to the gift and not later than the due date of your tax return.
Of course, you will be interested to know how much money you may deduct. Individuals may deduct 50 percent of their income every year for 16 years; farmers and ranchers may deduct 100 percent. To illustrate, a non-farmer landowner whose taxable income every year is $50,000 may deduct $50,000 every year for 16 years for a total of $800,000. The total deduction, though, is capped at the fair market value of the donated conservation easement.
If you are going to donate a conservation easement, I advise that you hire an attorney. While you should not construe anything in my column as legal advice, I do advise this because a conservation easement involves much more than I have discussed here. Additionally, a tax attorney or an accountant experienced in conservation easements can help you with actually claiming the deduction.
In addition to being an owner at BCM, Jason is vice-chair of the New Hampshire Bar Association’s Ethics Committee and lives in Peterborough.
This article was originally published in The Monadnock Ledger-Transcript.