Conservation easement
Encyclopedia
In the United States
, a conservation easement (also called a conservation covenant or conservation restriction) is an encumbrance
— sometimes including a transfer of usage rights (easement
) — which creates a legally enforceable land preservation agreement between a landowner and a government agency (municipality, county, state, federal) or a qualified land protection organization (often called a "land trust
"), for the purposes of conservation
. It restricts real estate development
, commercial and industrial uses, and certain other activities on a property to a mutually agreed upon level. The property remains the private property of the landowner.
The decision to place a conservation easement on a property is strictly a voluntary one where the easement is sold or donated. The restrictions of the easement, once set in place, "run with the land" and are binding on all future owners of the property (in other words, the restrictions are perpetual). The restrictions are spelled out in a legal document that is recorded in the local land records and the easement becomes a part of the chain of title
for the property. Appraisals of the value of the easement, and financial arrangements between the parties (land owner and land trust), generally are kept private.
The primary purpose of a conservation easement is to protect land from certain forms of development or use. Lands for which conservation easements may be desirable include agricultural land, timber
resources, and/or other valuable natural resources such as wildlife
habitat
, clean water, clean air, or scenic open space. Protection is achieved primarily by separating the right to subdivide and build on the land from the other rights of ownership. The landowner who gives up these "development rights" continues to privately own and manage the land and may receive significant state and federal tax
advantages for having donated and/or sold the conservation easement. Perhaps more importantly, the landowner has contributed to the public good
by preserving the conservation values associated with their land for future generations. In accepting the conservation easement, the easement holder has a responsibility to monitor future uses of the land to ensure compliance with the terms of the easement and to enforce the terms if a violation occurs.
Although a conservation easement prohibits certain uses by the landowner, such an easement does not make the land public. On the contrary, many conservation easements confer no use of the land either to the easement holder or to the public. Furthermore, many conservation easements reserve to the landowner specific uses which if not reserved would be prohibited. Some conservation easements confer specific uses to the easement holder or to the public. These details are spelled out in the legal document that creates the conservation easement.
may be eligible for a federal income tax deduction
equal to the value of their donation. The value of the easement donation, as determined by a qualified appraiser
, equals the difference between the fair market value
of the property before and after the easement takes effect.
To qualify for this income tax deduction, the easement must be: a) perpetual; b) held by a qualified governmental or non-profit organization; and, c) serve a valid "conservation purpose," meaning the property must have an appreciable natural, scenic, historic, scientific, recreational, or open space value. As a result of new legislation signed by President George W. Bush
on August 17, 2006 (H.R. 4 - The Pensions Protection Act of 2006), in 2006 and 2007, conservation easement donors may deduct the value of their gift at the rate of 50% of their adjusted gross income (AGI) per year. Further, landowners with 50% or more of their income from agriculture may be able to deduct the donation at a rate of 100% of their AGI. Any amount of the donation remaining after the first year can be carried forward for fifteen additional years (allowing a maximum of sixteen years within which the deduction may be utilized), or until the amount of the deduction has been used up, whichever comes first. With the passage of the Farm Bill in the summer of 2008 these expanded federal income tax incentives were extended such that they also apply to all conservation easements donated in 2008 and 2009.
Attorney Philip Tabas of The Nature Conservancy
promoted the state tax credit idea widely in the 1990's. In 1999 four state legislatures enacted state tax credit programs (Virginia, Delaware, Colorado, and Connecticut, in that order). South Carolina and California followed in 2000. Several other states have followed since.
For landowners with little income subject to state taxation, a tax credit is a hollow reward for reducing the value of real property by donating a conservation easement. To respond to this, Colorado conservationists made their state tax credit transferable in 2000 -- that is, the donor/landowner can sell her/his credit to other parties; the buyers then use the purchased tax credit to pay their Colorado income tax. This is appealing to buyers because the credit is sold at a discount from face value. Virginia followed by enacting transferability in 2002. Delegate Bill Howell (now Speaker of the Virginia House of Delegates) introduced HB1322, which had been suggested to him by conservationists Charles Davenport and Phil Hocker. HB1322 was enacted, effective retroactively to 1Jan2002. Other states have followed since. However, "caps" on the amount of credit an easement can generate, and other restrictions, limit the scope of the different state tax credit programs in varying manners.
In the states where credit for conservation land donations is transferable, free markets have arisen. Brokers assist landowners with excess credit to contact buyers, and the brokers often handle payments and paperwork to protect the principals, and to ensure that transfers are fully reported to the state tax authorities. The federal and state tax treatment of profits from sale and use of transferable tax credit have been the subject of extensive discussion and the issuance of several guidance documents by the Internal Revenue Service.
The New Mexico state income tax credit was originated in 2003.[SB 581] New transferability legislation, effective January 1, 2008, applies retroactively to conservation easements effected from January 1, 2004.
The Virginia transferable credit program is far the largest among the States in dollar value of property conserved. By the end of 2010, $2,512,000,000 of property value had been donated as easements in Virginia for which tax credit was claimed. The qualifying easements cover over 516000 acres (2,088.2 km²) of Virginia landscape. The Virginia program now (2011) grants about $110 million of new tax credit each year. The credit allowance is 40% of the appraised value of the easement donation, so this equates to $275 million of property value donated per year for protection of wildlife habitat, farmland and woodland, and scenic open space -- in perpetuity. The other state tax credit programs are smaller in dollar measurement, but are very significant in the area and the conservation values that they cause to be protected. The concept of state tax credit action (in the absence of a federal tax credit) that Philip Tabas and The Nature Conservancy promoted in the 1990s has borne remarkable fruit, and continues to expand today.
, Virginia
, Maryland
, and North Carolina
) offer a state income tax incentive and many states offer property tax
incentives to conservation easement donors.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, a conservation easement (also called a conservation covenant or conservation restriction) is an encumbrance
Encumbrance
Encumbrance is legal technical terminology for anything that affects or limits the title of a property, such as mortgages, leases, easements, liens, or restrictions. Also, those considered as potentially making the title defeasible are encumbrances...
— sometimes including a transfer of usage rights (easement
Easement
An easement is a certain right to use the real property of another without possessing it.Easements are helpful for providing pathways across two or more pieces of property or allowing an individual to fish in a privately owned pond...
) — which creates a legally enforceable land preservation agreement between a landowner and a government agency (municipality, county, state, federal) or a qualified land protection organization (often called a "land trust
Land trust
There are two distinct definitions of a land trust:* a private, nonprofit organization that, as all or part of its mission, actively works to conserve land by undertaking or assisting in land or conservation easement acquisition, or by its stewardship of such land or easements; or* an agreement...
"), for the purposes of conservation
Conservation movement
The conservation movement, also known as nature conservation, is a political, environmental and a social movement that seeks to protect natural resources including animal, fungus and plant species as well as their habitat for the future....
. It restricts real estate development
Real estate development
Real estate development, or Property Development, is a multifaceted business, encompassing activities that range from the renovation and re-lease of existing buildings to the purchase of raw land and the sale of improved land or parcels to others...
, commercial and industrial uses, and certain other activities on a property to a mutually agreed upon level. The property remains the private property of the landowner.
The decision to place a conservation easement on a property is strictly a voluntary one where the easement is sold or donated. The restrictions of the easement, once set in place, "run with the land" and are binding on all future owners of the property (in other words, the restrictions are perpetual). The restrictions are spelled out in a legal document that is recorded in the local land records and the easement becomes a part of the chain of title
Chain of title
A chain of title is the sequence of historical transfers of title to a property. The "chain" runs from the present owner back to the original owner of the property. In situations where documentation of ownership is important, it is often necessary to reconstruct the chain of title...
for the property. Appraisals of the value of the easement, and financial arrangements between the parties (land owner and land trust), generally are kept private.
The primary purpose of a conservation easement is to protect land from certain forms of development or use. Lands for which conservation easements may be desirable include agricultural land, timber
Timber
Timber may refer to:* Timber, a term common in the United Kingdom and Australia for wood materials * Timber, Oregon, an unincorporated community in the U.S...
resources, and/or other valuable natural resources such as wildlife
Wildlife
Wildlife includes all non-domesticated plants, animals and other organisms. Domesticating wild plant and animal species for human benefit has occurred many times all over the planet, and has a major impact on the environment, both positive and negative....
habitat
Habitat (ecology)
A habitat is an ecological or environmental area that is inhabited by a particular species of animal, plant or other type of organism...
, clean water, clean air, or scenic open space. Protection is achieved primarily by separating the right to subdivide and build on the land from the other rights of ownership. The landowner who gives up these "development rights" continues to privately own and manage the land and may receive significant state and federal tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
advantages for having donated and/or sold the conservation easement. Perhaps more importantly, the landowner has contributed to the public good
Public good
In economics, a public good is a good that is non-rival and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability means that no one can be effectively excluded from using the good...
by preserving the conservation values associated with their land for future generations. In accepting the conservation easement, the easement holder has a responsibility to monitor future uses of the land to ensure compliance with the terms of the easement and to enforce the terms if a violation occurs.
Although a conservation easement prohibits certain uses by the landowner, such an easement does not make the land public. On the contrary, many conservation easements confer no use of the land either to the easement holder or to the public. Furthermore, many conservation easements reserve to the landowner specific uses which if not reserved would be prohibited. Some conservation easements confer specific uses to the easement holder or to the public. These details are spelled out in the legal document that creates the conservation easement.
Income Tax Deductions
Landowners who donate a "qualifying" conservation easement to a "qualified" land protection organization under the regulations set forth in 170(h) of the Internal Revenue CodeInternal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
may be eligible for a federal income tax deduction
Tax deduction
Income tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions...
equal to the value of their donation. The value of the easement donation, as determined by a qualified appraiser
Appraiser
An appraiser , is one who sets a value upon property, real or personal. In England the business of an appraiser is usually combined with that of an auctioneer, while the word itself has a similar meaning to that of "valuer." In the United States, the most common usage relates to real estate...
, equals the difference between the fair market value
Fair market value
Fair market value is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or...
of the property before and after the easement takes effect.
To qualify for this income tax deduction, the easement must be: a) perpetual; b) held by a qualified governmental or non-profit organization; and, c) serve a valid "conservation purpose," meaning the property must have an appreciable natural, scenic, historic, scientific, recreational, or open space value. As a result of new legislation signed by President George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
on August 17, 2006 (H.R. 4 - The Pensions Protection Act of 2006), in 2006 and 2007, conservation easement donors may deduct the value of their gift at the rate of 50% of their adjusted gross income (AGI) per year. Further, landowners with 50% or more of their income from agriculture may be able to deduct the donation at a rate of 100% of their AGI. Any amount of the donation remaining after the first year can be carried forward for fifteen additional years (allowing a maximum of sixteen years within which the deduction may be utilized), or until the amount of the deduction has been used up, whichever comes first. With the passage of the Farm Bill in the summer of 2008 these expanded federal income tax incentives were extended such that they also apply to all conservation easements donated in 2008 and 2009.
Income Tax Credits (states)
Land conservation advocates have long tried to enact additional tax incentives for landowners to donate easements, above the federal charitable deduction (and state tax deduction in states that conform to federal tax process). There has been discussion of creating a federal income tax credit for easement donors since around 1980.(comments?) However, no federal tax credit has been enacted. States, however, have moved ahead to grant credits that can be used to pay state income tax to donors of qualified conservation easements. In 1983, North Carolina became the first state to establish such a program.[G.S.§105-151.12]Attorney Philip Tabas of The Nature Conservancy
The Nature Conservancy
The Nature Conservancy is a US charitable environmental organization that works to preserve the plants, animals, and natural communities that represent the diversity of life on Earth by protecting the lands and waters they need to survive....
promoted the state tax credit idea widely in the 1990's. In 1999 four state legislatures enacted state tax credit programs (Virginia, Delaware, Colorado, and Connecticut, in that order). South Carolina and California followed in 2000. Several other states have followed since.
For landowners with little income subject to state taxation, a tax credit is a hollow reward for reducing the value of real property by donating a conservation easement. To respond to this, Colorado conservationists made their state tax credit transferable in 2000 -- that is, the donor/landowner can sell her/his credit to other parties; the buyers then use the purchased tax credit to pay their Colorado income tax. This is appealing to buyers because the credit is sold at a discount from face value. Virginia followed by enacting transferability in 2002. Delegate Bill Howell (now Speaker of the Virginia House of Delegates) introduced HB1322, which had been suggested to him by conservationists Charles Davenport and Phil Hocker. HB1322 was enacted, effective retroactively to 1Jan2002. Other states have followed since. However, "caps" on the amount of credit an easement can generate, and other restrictions, limit the scope of the different state tax credit programs in varying manners.
In the states where credit for conservation land donations is transferable, free markets have arisen. Brokers assist landowners with excess credit to contact buyers, and the brokers often handle payments and paperwork to protect the principals, and to ensure that transfers are fully reported to the state tax authorities. The federal and state tax treatment of profits from sale and use of transferable tax credit have been the subject of extensive discussion and the issuance of several guidance documents by the Internal Revenue Service.
The New Mexico state income tax credit was originated in 2003.[SB 581] New transferability legislation, effective January 1, 2008, applies retroactively to conservation easements effected from January 1, 2004.
The Virginia transferable credit program is far the largest among the States in dollar value of property conserved. By the end of 2010, $2,512,000,000 of property value had been donated as easements in Virginia for which tax credit was claimed. The qualifying easements cover over 516000 acres (2,088.2 km²) of Virginia landscape. The Virginia program now (2011) grants about $110 million of new tax credit each year. The credit allowance is 40% of the appraised value of the easement donation, so this equates to $275 million of property value donated per year for protection of wildlife habitat, farmland and woodland, and scenic open space -- in perpetuity. The other state tax credit programs are smaller in dollar measurement, but are very significant in the area and the conservation values that they cause to be protected. The concept of state tax credit action (in the absence of a federal tax credit) that Philip Tabas and The Nature Conservancy promoted in the 1990s has borne remarkable fruit, and continues to expand today.
Estate Tax Reductions and Exclusions
For landowners who will leave sizable estates upon their death, the most important financial impact of a conservation easement may be a significant reduction in estate taxes. Estate taxes often make it difficult for heirs to keep land intact and in the family because of high estate tax rates and high development value of land. It may be necessary to subdivide or sell land for development in order to pay these taxes which may not be the desire of the landowner or their heirs. A conservation easement can often provide significant help with this problem in three important ways:- Reduction in Value of Estate. The deceased's estate will be reduced by the value of the donated conservation easement. As a result, taxes will be lower because heirs will not be required to pay taxes on the extinguished development rights. In other words, heirs will only have to pay estate taxes on preserved farmland values, and not full development values.
- Estate Exclusion. Section 2031(c) of the tax code provides further estate tax incentives for properties subject to a donated conservation easement. When property has a qualified conservation easement placed upon it, up to an additional 40% of the value of land (subject to a $500,000 cap) may be excluded from the estate when the landowner dies. This exclusion is in addition to the reduction in land value attributable to the easement itself as described above.
- After Death Easement. Heirs may also receive these benefits (but not the income tax deduction) by electing to donate a conservation easement after the landowner's death and prior to filing the estate return (called a "post mortem" election).
State and Property Tax Incentives
Some states (ColoradoColorado
Colorado is a U.S. state that encompasses much of the Rocky Mountains as well as the northeastern portion of the Colorado Plateau and the western edge of the Great Plains...
, Virginia
Virginia
The Commonwealth of Virginia , is a U.S. state on the Atlantic Coast of the Southern United States. Virginia is nicknamed the "Old Dominion" and sometimes the "Mother of Presidents" after the eight U.S. presidents born there...
, Maryland
Maryland
Maryland is a U.S. state located in the Mid Atlantic region of the United States, bordering Virginia, West Virginia, and the District of Columbia to its south and west; Pennsylvania to its north; and Delaware to its east...
, and North Carolina
North Carolina
North Carolina is a state located in the southeastern United States. The state borders South Carolina and Georgia to the south, Tennessee to the west and Virginia to the north. North Carolina contains 100 counties. Its capital is Raleigh, and its largest city is Charlotte...
) offer a state income tax incentive and many states offer property tax
Property tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
incentives to conservation easement donors.
Issues to Consider
- As is the case with any property interest, a conservation easement may be taken by eminent domain (and thereby extinguished) when the public value of the proposed project exceeds that of the conservation interest being protected by the easement.
- Conservation easements may result in a significant reduction in the sale price of the land because a builder can no longer develop it. In fact, this difference in value is the basis for the granting of the original tax incentives.
Purchase of Agricultural Conservation Easement programs
In 1974, Suffolk County in New York enacted the first PACE (also known as purchase of development rights or PDR) program. King County in Washington and the states of Maryland, Massachusetts, and Connecticut quickly followed suit. As of 2003, the PACE program operates in 23 states, including 19 statewide and more than 45 local programs.http://www.csrees.usda.gov/nea/nre/in_focus/ere_if_preserve_programs.htmlSee also
- Land useLand useLand use is the human use of land. Land use involves the management and modification of natural environment or wilderness into built environment such as fields, pastures, and settlements. It has also been defined as "the arrangements, activities and inputs people undertake in a certain land cover...
- Easement refugeEasement refugeAn easement refuge is a special type of National Wildlife Refuge under the auspices of the United States Fish and Wildlife Service.On an easement refuge, the Refuge boundaries encompass private land but the Fish and Wildlife Service does not own the land...
- Freedom to roam
- Natural landscapeNatural landscapeA natural landscape is a landscape that is unaffected by human activity. A natural landscape is intact when all living and nonliving elements are free to move and change. The nonliving elements distinguish a natural landscape from a wilderness. A wilderness includes areas within which natural...
- Prime farmlandPrime farmlandPrime farmland is a designation assigned by U.S. Department of Agriculture defining land that has the best combination of physical and chemical characteristics for producing food, feed, forage, fiber, and oilseed crops and is also available for these land uses....
- William GinsbergWilliam GinsbergWilliam Ginsberg was an attorney, environmentalist, author and professor of environmental law. Ginsberg served as commissioner of parks and recreation in New York City, to which post he was appointed by Mayor John Lindsay in 1968....
, attorney who litigated pioneering case regarding tax deductibility of conservation easements
External links
- How a conservation easement works - Private Landowner Network
- "Conservation Easements": The Nature ConservancyThe Nature ConservancyThe Nature Conservancy is a US charitable environmental organization that works to preserve the plants, animals, and natural communities that represent the diversity of life on Earth by protecting the lands and waters they need to survive....
. - The Conservation Easement Handbook: The Trust for Public LandThe Trust for Public LandThe Trust for Public Land is a land conservation nonprofit founded in 1972 by Huey Johnson and based in San Francisco, California in the United States. TPL works throughout the United States to conserve land for people as parks, gardens, and other natural places.- TPL Conservation Initiatives :TPL...
and the Land Trust AllianceLand Trust AllianceThe Land Trust Alliance, originally formed in 1982 as the Land Trust Exchange, is a national conservation organization representing more than 1,700 land trusts across the United States... - Resources for Landowners: American Land ConservancyAmerican Land ConservancyThe mission of American Land Conservancy is to conserve land for the benefit of people and wildlife.- About ALC :American Land Conservancy is a non-profit land conservation organization dedicated to protecting America’s natural heritage by conserving land for the benefit of people and wildlife...
- "Understanding PACE": American Farmland TrustAmerican Farmland TrustThe American Farmland Trust is an organization founded to preserve farmland and ranchland in the United States and to promote sustainable agricultural practices....
- Farmland Information Center
- Land Protection Methods For Land Trusts and Landowners: Woodland StewardsWoodland StewardsWoodland Stewards, Inc. is a conservation land trust in the United States whose mission is to assist landowners with land protection efforts. When landowners in the Coos, Grafton or Carroll counties of New Hampshire wish to protect their land, Woodland Stewards can accept the land or conservation...
- PCC Farmland Trust
- The National Conservation Easement Database (NCED)
- Conservation easements at the New York State Department of Environmental Conservation