Conservation Tax Incentives for Landowners

Corporations and individuals often search for ways to limit the tax liabilities associated with land ownership. One useful tool that is frequently overlooked is a conservation easement.

A conservation easement is a recorded legal agreement between the landowner and the holder of the easement in which the landowner voluntarily places restrictions on the land that protect natural, productive or cultural features. The landowner continues to hold title to the property and may continue to use the property in any manner he chooses, so long as the specific restrictions in the easement are not violated. To take advantage of the tax benefits of such an agreement, the holder of the easement must be a qualified non-profit organization (such as a land trust) with a conservation purpose. Federal tax law defines a conservation purpose as the preservation of open space for scenic enjoyment, for public outdoor recreation, for the protection of relatively natural habitats of fish, wildlife or plants, or for land with historical significance.

Conservation easements are recognized for legal and tax purposes by the State of Texas (Chapter 183, Texas Natural Resources Code) and the Internal Revenue Service (Internal Revenue Code, Section 170 (h)). The federal income tax benefits of donating a conservation easement are similar to those of making other charitable contributions. A landowner may be able to deduct up to the full value of the conservation easement from his federal income taxes. Texas law requires that the value of the conservation easement be determined by a real estate appraiser. The value of the easement is the difference between the value of a property with the conservation easement and the value of a property without the conservation easement.

Example: A tract of land may be worth $250,000 as a potential office development, but only worth $50,000 as open-space or recreational property. If the landowner donated a conservation easement that prohibited new construction on the property, the result would be a $200,000 charitable contribution eligible for deduction from federal income taxes. (In many cases, the expenses incurred by a landowner in the donation process, including the cost for legal fees and title insurance, is also tax deductible.)

While the resulting federal income tax deduction must be spread out (only 30% of the landowner's adjusted gross income may be deducted in one year), the estate and property tax benefits can be realized immediately. For purposes of estate taxation, federal law requires that the land be valued according to its "highest and best use," which will be significantly reduced by a conservation easement. The easement must be granted during the lifetime of the donor or in a legal will in order to realize this reduction in value. Local ad valorem valuation should also take effect immediately, but the landowner should coordinate with the property taxing authorities to ensure proper valuation of the land.

In April of this year, the United States Senate passed the CARE Act (S 476), which, if signed into law, would increase the financial incentives for granting conservation easements.
  

For further information on this topic, please contact Matthew Marchant at matthew.marchant@strasburger.com or Beth Tiggelaar at beth.tiggelaar@strasburger.com.

     
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