An Introduction to Conservation Easements
What is a Conservation Easement?
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A conservation easement is the legal glue that binds a property owner's good intentions to the land in perpetuity. Donors of conservation easements retain title to their property. They grant conservation easements to protect their land from inappropriate development. A conservation easement runs with the title to the property regardless of changes in future ownership.
Granting an easement can yield tax savings. Think of land ownership as holding a bundle of rights that may include the right to subdivide, construct buildings, irrigate, harvest timber or restrict access. A landowner may sell or donate the whole bundle of rights or just one or two of those rights. To give away certain rights for the purpose of conservation, while retaining others, a property owner grants a deed of conservation easement to a land trust like the Montana Land Reliance (MLR). The donation of an easement may qualify as a charitable contribution. As such, it may reduce income, estate and gift taxes.
What are the Terms of a Conservation Easement?
A conservation easement spells out the uses that are consistent and inconsistent with the conservation values desired by the landowner. It is a voluntary agreement between a landowner and the Montana Land Reliance. No two conservation easements are alike. Each is tailored to the unique character of the land and the conservation desires of its owner(s).
The following are general examples of the types of uses that can be allowed by a conservation easement:
- Continued agricultural and silvicultural use
- Construction of buildings, fences, water improvements, etc., necessary for agriculture and compatible with conservation objectives
- Sale, devise, gifting or other method of transferring parcels, subject to terms of the easement
- Landowner control of access
- Additional family and employee residences compatible with conservation objectives
- Wildlife and fisheries protection, restoration and enhancement projects
- Any and all uses not specifically prohibited
Types of uses that are generally restricted by a conservation easement include:
- Subdivision for residential or commercial activities
- Construction of non-agricultural buildings
- Nonagricultural commercial activities
- Dumping of non-compostable or toxic waste
- Surface mining
A conservation easement assigns three "positive rights" to MLR:
- The right to preserve and protect the property according to mutually agreed upon terms.
- The right (with proper advance notification to the landowner) to enter the property to monitor activities (usually once a year).
- The right to "enjoin and restore," which assures that the landowner's desires, as spelled out in the easement, are enforceable.
The terms of the easement do not in any way negate or modify state or federal law. Specifically, a conservation easement cannot prevent condemnation.
What are the Legal Requirements?
Montana law authorizes the grant of conservation easements to qualified private organizations. It requires that the county planning authority review the easement and give non-binding advice about the easement's effect on the county's comprehensive plan, if one exists. Finally, the law requires that the deed of conservation easement be duly recorded.
Federal law governs only the tax treatment of a conservation easement as a charitable gift. While you should consult your attorney or a person knowledgeable of federal requirements, in general the following major rules apply in order to receive a tax benefit:
- The conservation easement must be granted in perpetuity (mortgage and/or contract holders must agree to subordinate to the easement).
- The easement must provide at least one of the following three conservation purposes:
- Protection of relatively natural habitat for fish, wildlife, plants or similar ecosystems,
- Preservation of open space (including farmland or forest land) for (1) scenic enjoyment of the general public and/or (2) significant public benefit pursuant to a clearly delineated government policy,
- Preservation of land areas for the education of or outdoor recreation by the general public.
What are the Steps in Donating a Conservation Easement?
Once the decision has been made to donate a conservation easement, the landowner and the Montana Land Reliance agree on the specific terms of the easement. MLR prepares a resource report to document the condition of the property at the time the easement is donated. If the landowner intends to apply for a charitable income tax deduction, he or she must secure a subordination of any mortgage or contract holders, procure an appraisal and assure that mineral right ownership does not inhibit the placement of the conservation easement.
What are the Potential Tax Benefits?
When a conservation easement meets federal requirements as a charitable gift, the donor of the easement may be entitled to a reduction in income and/or estate taxes.
The value of the easement as a charitable gift is determined by a qualified appraiser who values the property before and after the easement restrictions are applied. The difference between these two values is the amount of the charitable gift for tax purposes. This gift amount is treated as a regular charitable contribution. There are limiting provisions. If the basis (usually purchase price) of the property is used as the before-easement value of the property, the deduction is limited to a maximum of 50 percent of the donor's adjusted gross income in that year. Any unused balance of the gift is limited to a maximum deduction of 50 percent of the adjusted gross income each year for the next five years. If the before-easement value of the property is determined by a qualified appraisal (rather than the basis as above), then the deduction is limited to a maximum of 30 percent of the donor's adjusted gross income in the year of the donation and each year for the next five years. Generally, where property has appreciated in value, the 30 percent option may be more advantageous. The 50 percent election is generally more appropriate for taxpayers whose property has been recently acquired and has appreciated little.
Estate and Gift Taxes
Conservation easements will ordinarily result in a reduction of the property value for estate and gift purposes. This can ease the financial burden of passing the property on to heirs. Conservation easements are a significant and useful estate planning tool. The amount of value reduction is unique to each property, but is generally the difference between its subdivision development value and its agricultural value.
Corporate Income Tax
In the event that the property is a C-corporation, the easement gift may be deducted against 10 percent of the corporation's annual net income before the year of donation with any unused balance limited to 10 percent of the annual net income each year for the next five years.
What Happens after the Easement is in Place?
Once a conservation easement is signed, MLR and the landowner begin a working relationship to assure that the intended conservation becomes a reality. MLR is not in the day-to-day land management business. Landowners continue to make all of their property management decisions while the easement limits only the broad parameters of land use, such as subdivision, commercial development, construction and surface mining. Annual monitoring visits are conducted by MLR stewardship staff. These visits foster good communication with the landowner and an opportunity to answer questions or respond to concerns. In many ways the conservation easement is a working partnership for the land. Mutual respect and clear understanding of easement terms have helped avoid potential conflict. Over our history, this system has served landowners well. Only a few minor easement infractions have occurred, and they have been resolved by voluntary compliance.
If You Need More Information
This page is intended to provide an overview of the conservation easement process. It is not intended to provide definitive legal or tax advice. If you need more specific information or would like to discuss a conservation easement donation, write or call one of our offices.
MONTANA LAND RELIANCE
324 Fuller Avenue, PO Box 355, Helena, MT 59624-0355
406-443-7027, fax 406-443-7061
470 Electric Avenue, PO Box 460, Bigfork, MT 59911-0460
848 Main St, Suite 4A, P.O. Box 1135, Billings, MT 59103-1135