Tax Considerations of
Conservation Easements

Donation of a conservation easement is a tax-deductible charitable gift, provided that the easement is perpetual and is donated "exclusively for conservation purposes" to a qualified conservation organization or public agency. Conservation purposes include protection of valuable farmland, relatively natural wildlife habitats and scenic open space, among others. The Teton Regional Land Trust (TRLT) is a non-profit, tax-exempt corporation dedicated to the conservation of the natural and agricultural resources of the Upper Snake River Valley. TRLT is recognized by the Internal Revenue Service as an appropriate organization to receive and act as steward for conservation easements. TRLT is also qualified to assess the conservation features of a property, to document that the property meets Internal Revenue Code Criteria.

To determine the value of the easement donation, the landowner has the property appraised both at its fair market value without the easement restrictions and at its fair market value with the easement restrictions. The difference between these two appraised values is the easement value. Detailed federal regulations govern how these appraisals are done. Teton Regional Land Trust can recommend credible appraisers who are aware of these regulations and experienced in completing easement appraisals.

The easement donor is eligible to deduct up to 30% of his adjusted gross income each year for the year of the easement donation and the following five years, or until the value of the easement gift is used up, whichever occurs first. (In the case of a conservation easement donated on a property within the same year that it is acquired, the donor may deduct up to 50% of adjusted gross income in the first year). Easement donors may gain greater tax benefits, especially where state tax deductions are applicable. A donor should consult with his or her legal and financial advisors.

Example: (We provide an example of a calculation of easement value for illustration only. The property described is a model, not an actual property. TRLT does not appraise property values, and recommends that landowners seek the advice of their personal legal and financial advisors. In our experience, easement donations are usually valued at 30% to 70% of the “before easement” land value.)

The Property: John and Emma Smith own 250 acres of undeveloped uplands in the foothills at the edge of Swan Valley, and wish to retain the right to build two permanent residences, each with one guest house (small temporary residence) and associated residential outbuildings on a 10 acre building area. The Smiths will retain use of their property for recreational purposes and enjoyment, but may not develop lands outside the two designated building areas. (Actual building area locations may be designated after donation of the conservation easement.) They also hope to enhance wildlife habitats on the property, which is valuable as habitat for many wildlife species.

The Appraisal: The Smiths wish to place their property under conservation easement. They retain an appraiser to learn the value of the conservation easement (= value of land without restrictions - value of land with conservation easement in place).

Land Value Before Easement: Fair market value is established by comparison with recent sales of raw land in the vicinity. This value is for raw land without improvements (roads etc. that might be associated with development) and without easement restrictions. All of this property has inflated value over its agricultural use because of strong development interest in the area. Raw land value without restrictions is estimated here at $3,500/acre for land parcels in the 250-acre size range.

Land Value After Easement: Easement restricted land value is learned through appraisals of comparable grazing, farming or wildlife lands where development pressures have not artificially inflated the price of land. This is the land value with easement restrictions in place that limit development. The appraisal also recognizes that some recreational development value is retained by reservation of building areas. After easement value is estimated here at $1,000/acre.

Charitable Donation: 250 acres of land at $2,500 difference in value/acre = donation value of $625,000.

Example Calculation of Income Tax Benefit

• Landowner = John Smith
  Adjusted Income = $150,000
  Property = 250 Acre Ranch.
  The Smiths plan to keep 20 acres for building areas and to restrict development on the remaining 230 acres.
• APPRAISAL:
  250 Acres Ranch Land Development Value is $3,500/acre x 250 Acres =$875,000
  Restricted Value is $1,000/acre x 250 Acres =$250,000
  Easement Donation Value $625,000
• The value of the donation of a conservation easement is always equal to the difference between the values of the property before the easement in place, and with the easement in place. A qualified appraiser must make this determination.

FEDERAL TAX SAVINGS: According to income tax regulations, the Smith’s may deduct up to 30%of adjusted gross income each year for charitable contributions, and may carry over the deduction for up to a total of six years if necessary. Since the value of the donation exceeds 30% of the Smith's adjusted income, they may deduct up to $45,000 per year, or a total of $270,000 in income deductions over six years. At a tax rate of 31%, this deduction translates to a federal tax savings of $83,700 for the entire donation. Were the Smith's to make their easement donation when they expected an unusual income windfall, they could realize the full available tax benefit of $193,750 (31% of $625,000). They might also donate the easement in two steps rather than at one time, and thus spread their tax benefit over a longer time period.

Additional state tax savings may also be available. These calculations are provided for illustrative purposes only; the Teton Regional Land Trust cannot warrant final results. Individual tax situations vary widely, therefore, review by independent, professional, tax and/or legal counsel is recommended.

Estate Tax Considerations: Estate taxes are a serious consideration for many landowners because their land values are so high. The new 1997 tax law allows for an increase in the deduction for all estates, ultimately up to one million dollars in value. However, very valuable lands will still represent a considerable estate tax liability. Conservation easements can reduce the value of an estate. The estate tax charitable donation is unlimited.

Further, the Taxpayer Relief Act of 1997 will ease inheritance tax on certain land that is subject to a permanent conservation easement. All lands within 25 miles of a National Park or designated wilderness area meet the criteria of this portion of the law. Essentially, the law will allow exclusion for estate tax considerations of 40% of the value of land subject to conservation easement up to a total of $500,000 per estate. This tax relief, combined with the overall reduction in property value that results from easement donation, will result in tremendous estate tax savings for many landowners.