Agreeing to deed land or a conservation easement is one way to realize the appreciated value in your land without selling it for subdivision or development.
The value of land or a conservation easement to be granted is determined by an independent real estate appraisal. For a conservation easement, the appraiser looks at the fair market value of the land as it exists, and what the market value would be with the conservation easement in place. The difference is the value of the easement. The landowner’s tax benefits or grant payments are based on this appraised value.
Conservation easement values typically range from 25% to 60% of the fair market value of the land. The easement value, and therefore the owner’s financial benefit, is larger when significant development rights are given up. For example, an easement that gives up the right to build homes on existing legal parcels will likely have higher appraised value than giving up the right to subdivide an existing parcel. Easement values tend to be higher for land nearest to cities or towns, where the potential for development is more realistic. Donating a conservation easement over land that is likely not suitable for subdividing, building or cultivation – such as very steep slopes or land designated as environmentally sensitive habitat on county zoning maps – will not be highly valued.
At the state and federal level, current law provides an income tax deduction for the donation of land or a conservation easement. Deductions are limited to a percentage of adjusted gross income, but may be taken over several years.
Donating land or an easement can also yield significant estate tax savings. The value of the land or easement donated for conservation is no longer part of the taxable estate. In addition, a percentage of the remaining appraised value of land subject to a conservation easement is exempt from federal estate tax. Since 1998, the law also allows a conservation easement to be donated by the estate for a short period of time after a landowner’s death. Conservation easements can also be used with the “like-kind exchange” provisions of the tax law to defer or avoid taxes on capital gain.
In California, the new Natural Heritage Preservation Tax Credit offers a credit against the landowner’s income tax equal to 55% of the value of qualifying land or easement donations, and it may be claimed over seven years. Unfortunately, due to state budget shortfalls the tax credit has been suspended for the budget year July 2002 – June 2003.
The Land Trust can help you develop and appraise qualifying conservation strategies that fit with your family and business plans. Your tax advisor can then compare the economic outcome of donating or selling a conservation easement to other possible futures for your land.
Sometimes a landowner offers a bargain sale of land or an easement. This means selling at a price below the full appraised value. The difference in price is considered a charitable contribution, generating a tax deduction that helps offset income or capital gains taxes from selling the land or easement. You should consult your own tax advisor to structure the best transaction possible.
It is generally easier for the Land Trust to complete projects where land or a conservation easement is being donated. A donated land interest, if based on the Land Trust model easement (or a similar one), and after a qualified real estate appraisal is done, is eligible to be claimed as a deduction beginning the year it is recorded with the owner’s income tax filings.
Purchasing land and easements requires some combination of community fundraising, writing grants to government agencies and foundations, plus a lot of paperwork and negotiating with those funding sources. All of this takes time and money. The availability of grants varies from year to year. Conservation easements purchased with government grants may come “with strings attached.” Projects with multiple funding sources mean more agency staff and lawyers, with different views on how easement restrictions or legal clauses should be written. The Land Trust helps negotiate these issues between the landowner and the agencies.
Land that is required to be protected as a mitigation or condition of approval of a government permit for development is not eligible for either tax incentives or grant funding. The Land Trust does hold some conservation easements for mitigation land, where the developer chose to grant the easement to our organization rather than to a government agency.
Our Links page and the Publications list offer sources of detailed information on these landowner conservation incentives.