Sarah Lewis Belcher, Bond Schoeneck & KingThe Internal Revenue Code provides a charitable deduction for a “qualified conservation contribution,” i.e. a contribution of a “qualified real property interest” to a “qualified organization” exclusively for “conservation purposes.” A “qualified real property interest” is the donor’s entire interest, a remainder interest, or a restriction on use. “Qualified organizations” include 501(c)(3) tax-exempt entities and governmental units. A contribution made exclusively for “conservation purposes” must be granted in perpetuity and includes preservation:
(1) for outdoor recreation by, or the education of, the general public;
(2) of a relatively natural habitat;
(3) of open space (including farmland or forest land) for scenic enjoyment of the general public or pursuant to a clearly delineated governmental conservation policy; or
(4) of a historically important land area or certified historic structure.
Individuals are allowed a qualified conservation contribution deduction for federal income tax, provided the aggregate does not exceed 50% of the taxpayer’s contribution base over the amount of all other allowed charitable contributions. For qualified farmers whose gross income from farming is greater than 50% of their gross income, 100% rather than 50% is used. If the aggregate contributions exceed the limitation, the excess may be carried over for 15 years.
New York state also allows a tax credit for conservation easements that comply with the New York Environmental Conservation Law and Internal Revenue Code. The credit is 25% of the real property taxes on the land subject to the easement, up to a $5,000 per year. The amount of the easement tax credit and any other credit for real property taxes may not exceed the property taxes. If the amount of credit for any taxable year exceeds the taxpayer’s income tax, the excess is either credited or refunded to the taxpayer.
A conservation easement also provides estate tax benefits by reducing the value of the landowner’s taxable estate. The lesser of $500,000 or the “applicable percentage” of the value of land subject to the easement, reduced by the amount of any charitable deduction with respect to the land, is excluded from the landowner’s taxable estate. The “applicable percentage” is 40% reduced by 2% for each percent by which the value of the easement is less than 30% of the value of the real estate.
Conservation easements are often donated in return for the tax savings, but all or part of their value may also be sold for cash. Government funding may be available through purchase of development rights programs. For example, the New York State Department of Agriculture and Markets’ Farmland Protection Implementation Grant Program provides funds to protect agricultural land. Conservation organizations also may raise funds and/or access grants.
A number of factors should be considered when negotiating the terms of a conservation easement. First, the purpose of the easement must be determined. It may be to provide outdoor recreation, or allow for education of the general public or to preserve:
(1) natural habitat for fish, wildlife, plants or similar ecosystems;
(2) open space for scenic enjoyment or pursuant to a clearly delineated governmental conservation policy; or
(3) a historically important land area or historic structure.
Second, activities such as hunting, fishing, lumbering, agriculture, farm housing and/or motorized vehicles that will continue to be allowed on the property, must be delineated.
The property owner must also choose a qualified organization to which the easement will be granted. Potential recipients are land trusts, governmental entities or other organizations with a mission related to the purpose of the easement. The owner should discuss any requirements the organization may have in connection with the easement. For example, some entities require the owner to fund an endowment to pay for the continued stewardship of the property and any monitoring/ reporting that must be done.
The owner then works with the easement recipient to determine whether the value of the easement will be entirely donated or if there are any funding programs available to pay for the purchase of all or a portion of the easement’s value. The terms of any potential funding programs should be explored to confirm they are acceptable. Some grants require that a percentage of the easement’s value be donated by the landowner, so the amount of donation needed and associated grant amount should be calculated ahead of time.
An appraiser must be selected to value the conservation easement, which is generally determined by subtracting the value of the property as encumbered by the easement from the value of the property with no conservation easement limitations. There are specific appraisal guidelines that must be followed to withstand IRS scrutiny and there may also be appraisal requirements for any grant or other funding.
Landowners are also generally required to obtain a baseline report documenting the property condition when the easement is conveyed and against which any subsequent monitoring results are measured. Additionally, owners may have to provide a survey and title policy insuring the easement holder. These can be expensive and time consuming items so should be discussed with the potential easement holder at the outset.
There are concrete financial benefits for real property owners granting conservation easements. Although the restrictions placed on the property via a conservation easement are perpetual (but may be amended if stringent requirements are met), these easements allow landowners who desire that their property retain its natural, agricultural, historical or other conservation related benefits to receive the development rights value from their property that they otherwise would not realize.
Sarah Lewis Belcher, a real estate lawyer with Bond Schoeneck & King, Albany, N.Y.
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