Conservation Easements Protect Land, May Provide Tax Reductions

By Jamie Brown & Michael Gold

Land is a precious commodity in the Hudson Valley. As such, the Putnam County Land Trust works with willing landowners to protect their land.

Property owners who work with the PLCT ensure that future generations will be able to enjoy these special places. They may also be able to take advantage of tax benefits as part of the effort to protect their land.

A powerful tool that PCLT and other land trusts use to protect land is a conservation easement, which protects “significant natural, agricultural, or historic resources that public agencies or land trusts want to have conserved,” as established in the U.S. tax code.  

A conservation easement is a voluntary, legally binding agreement that limits the future use of the land. The property owner still owns the parcel, but under the terms of the easement, they have agreed to limit what they can do to that property. For example, they may not be able to cut any trees or build any kind of structure within the borders of the easement.

A property owner’s donation of a conservation easement can theoretically lower their income taxes. However, they must consult with their attorney and accountant to determine if such a donation will result in any tax benefits.

For income tax purposes, the value of the easement is the difference between the value of the land with the easement and its value without the easement. A professional, licensed appraiser must be employed by the landowner to determine the fair market value of the conservation easement.

Easement values are determined on a property-by-property basis. Most, but not all conservation easements will result in a reduction in value of any given parcel, although the level of any reduction from an easement can vary widely. In general, the highest easement values are found on tracts of open space under high development pressure.

A general example can offer some guidance on how easements may offer tax benefits.

Consider this scenario: Mrs. Smith owns a 50-acre parcel. Her land is appraised at the fair market value of $500,000. A developer has offered to purchase her property for that amount and plans to divide the property into several house lots, build houses on them, and sell them for a large profit. However, Mrs. Smith already has significant annual income and does not want to see another suburban development built that will degrade the area’s natural beauty. So after talking with her family, she decides to donate a conservation easement to the local land trust.

The terms of the easement will forbid Mrs. Smith and all future owners from developing the land, although they will be able to sell it subject to the terms of the agreement (which forbids the construction of houses). Once the easement is put in place and the land can no longer be developed, its value will decrease.

The appraiser returns to determine the value of the land now that the easement is in place. Based on comparable sales of land that is similarly protected by conservation easements, the appraiser determines that the land value is now $200,000. This appraiser confirms that the land value before the easement was $500,000. Therefore, the value of the easement is $300,000 – the difference between the “before” easement value, less the “after” value.

As Mrs. Smith has significant income, she may be able to use the $200,000 value of the donated easement for tax benefits. She will need to consult with her tax advisor to be sure.

The IRS tax code that governs how landowners can utilize conservation easements for federal tax deductions states that the easement must be donated for conservation purposes, which include outdoor recreation/education of the public; the protection of habitats for fish, wildlife, plants, and ecosystems; the preservation of open space including farmland and forests, where such preservation will yield a significant public benefit such as for the enjoyment of the public; to further a clearly delineated federal, state, or local governmental conservation policy; or the preservation of a historically important land area or certified historic structure.

Federal tax law is in a constant state of flux, so it is important to get up-to-date information as you plan any conservation transaction that depends on tax law.

If you are considering a donation of a conservation easement, contact Judy Terlizzi at the PCLT, at 845-743-3187 or judy@putnamcountylandtrust.org.

Jamie Brown is the New York senior program manager for the Land Trust Alliance, and Michael Gold is a trustee with the Putnam County Land Trust.