Donating land through easements provides tax breaks and pitfalls

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Editor's note: This is part of an ongoing series about conservation easements. Here, the financial benefits and pitfalls are exposed. Future articles will discuss landowner experiences, land trust groups and the process of donating a conservation easement.


There's money in land, and it's not necessarily a traditional real estate transaction. This revenue allows landowners to retain control and use of their property, yet still reap some economic benefits in the form of tax credits and deductions.

Donating property to a land trust in the form of a conservation easement gives landowners a federal tax deduction, a state tax credit and reduced estate taxes, but it also prohibits that land from ever being developed, mined or split into parcels and sold.

It does not limit the property's agricultural use and, depending on the easement contract, may not eliminate recreational uses, such as hunting and fishing.

Landowners enter into conservation easements for several reasons, the top two being the preservation of open space and agricultural values and the economic benefits.

"A conservation easement forever limits a landowner's ability to ever develop their property at great economic benefit," attorney Larry Kueter said. Kueter's firm, Isacson, Rosenbaum, Woods and Levy, P.C., has represented landowners and land trusts in more than 200 conservation easement transactions.

When a landowner donates property to a land trust in the form of a conservation easement, the value of that property drops. A landowners' tax credit or deduction is based on the change in the value of that property.

A qualified appraiser compares the property's value before the easement to its value after the easement is in place.

"The land would be valued the regular way -- on the open market -- then compared to the value set once the restrictions are in place," Kueter said. "The difference is the value of your conservation easement."

The donation or sale of property at less than fair market value of a conservation easement to a qualified land trust is treated as a charitable gift of the development rights. The donation creates a charitable income tax deduction on the landowner's federal income tax returns.

This type of charitable deduction may only be used to offset 30 percent of the landowner's adjusted gross income in the year the gift is made. However, the deduction can be used as needed over the following five years, offsetting up to 30 percent of adjusted gross income each year.

"You do not make money on a federal tax level," Kueter said. "The easement is a deduction."

Congress nearly passed a bill last year that extended the deduction time from 6 years to 15 years and from 30 percent of adjusted gross income to 50 percent.

The bill is expected to be addressed again this legislative session.

Until then, Kueter said, it is possible to do a conservation easement in phases to get the best benefit from tax deductions.

In Colorado, the first $260,000 of donated value of a conservation easement is treated as a credit against Colorado income taxes.

Forty percent of the donation in excess of $100,000 may be claimed as a credit.

According to Kueter, the effect is that a donation valued at $500,000 will generate a credit of $260,000 ($500,000 - $100,000 X 40 percent +100,000 = $260,000).

Any tax credit not used in the year of the gift can be carried forward and used to offset Colorado income taxes for up to 20 more years.

Unfortunately, the Colorado tax credit can only be used to offset what a landowner may owe. They can not get more money than was paid unless the state has a budget surplus and then the credit cannot exceed $50,000.

In addition, a conservation easement can lower the property value for estate tax purposes.

"A conservation easement is one of the tools of getting agricultural land to the next generation," Kueter said.

One potential benefit comes from the 1997 Taxpayer Relief Act. If an easement qualifies, then 40 percent of the value of the property is excluded from the value of the estate up to a maximum exclusion of $400,000.

If a landowner chooses to sell a conservation easement, the transaction is treated as a taxable sale of real estate. If the purchase price is deemed less than the value of the easement, the difference is considered a charitable donation.

"If you sell at a price less than the value of the easement, you may have sold and donated land at the same time. We call that a bargain sale," Kueter said. "You can sell a conservation easement just like you can donate it," Kueter said. "Unfortunately, there's not much money out there to buy conservation easements."

Landowners hoping to sell easements may be further restricted by the purchasing agency on the use of the land.

According to Kueter, a landowner needs to pay particular attention during the transaction, lest they donate a conservation easement that doesn't meet federal or state standards for the tax credit or deduction.

"Pay close attention," he said. "The worst case would be to give up the property without gaining the tax benefits. You can meet state standards for an easement without meeting the federal standards, but you have to satisfy the federal income tax standards to qualify for the state."

To qualify for federal tax benefits, the easement must be qualified as real property interest and be donated to a qualified conservation organization for conservation purposes. The purposes include preservation of land for outdoor recreation, protection of the natural habitat of fish, wildlife or plants, the preservation of open space, including farmland or forestland, or the preservation of historically important land or certified historic structure.

"Identification of conservation values is a necessary step to get the federal credit," Kueter said.

Also, the property owners mortgage company must subordinate, meaning it can still foreclose on the property, but the easement remains in effect.

"If a landowner has borrowed against the development value of the land, that's pretty tough to do," Kueter said.

Other federal standards include a provision that prohibits surface mining, a requirement that the easement be perpetual, which is not required by the state, and that the easement is recorded.

An avenue for reaping instant economic benefit from donating a conservation easement is to sell the tax credit.

"You have to do it with a lot of caution, but it is a perfectly legitimate way to do it," Kueter said. "It gives some immediacy to the benefit to the landowner."

On the flip side, while selling the credit may put cash in hand immediately, it will also be less than the revenue the landowner would have generated by keeping the credit. Purchasing tax credits only benefits the buyer if they're purchased at a discount.

According to Kueter, tax credits are usually sold for about 70 to 80 percent on the dollar.

Proceeds from the sale of a tax credit are treated as ordinary income and taxed that way.

"The federal government doesn't let any transfer of wealth go unpunished," Kueter said.

Because most land donated for a conservation easement is agricultural land, the donation doesn't usually change property taxes. If the easement reduces the land's value significantly, it may even reduce property taxes.

Christina M. Currie can be reached at 824-7031, Ext. 210 or by e-mail at ccurrie@craigdailypress.com.

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