Back 40: Conservation easements and taxes
By Jessie Wiese EBS Contributor
In the last issue of Explore Big Sky, we explored how conservation easements work and introduced potential benefits available to landowners who donate a conservation easement to a land trust. In this installment, we’ll take a look at associated tax benefits and touch on the process involved to set up an easement.
From a land conservation perspective, conservation easements are the only tool with the capacity to perpetually prevent inappropriate development on private lands containing some of the richest habitat and soils in the state. These lands are integral parts of ecosystems spanning both public and private land, and provide critical resources and habitat connectivity for Montana’s fish and wildlife.
Like all other types of easements, conservation easements are governed under Montana real property law, but federal tax law determines whether the donation of a conservation easement qualifies as a tax-deductible charitable gift. Parties interested in a conservation easement should consult an attorney or other professional with knowledge of the federal requirements, which include the following:
- The conservation easement must be granted in perpetuity, meaning it is of perpetual duration, applies to all future owners, and takes priority over the rights of mortgage and contract-for-deed holders, who must agree to subordinate their rights to the easement.
- The easement must provide at least one of the following four conservation purposes:
- Protection of relatively natural habitat for fish, wildlife, plants, or similar ecosystems
- Preservation of open space that will yield a significant public benefit, for the scenic enjoyment of the general public and/or pursuant to a clearly delineated governmental conservation policy
- Preservation of land areas for the education of, or outdoor recreation by the general public
- Preservation of a historically important land area or structure
- The easement must be granted to a qualified organization, such as a nonprofit land trust or governmental entity.
- The easement must prohibit uses which would destroy the conservation values protected by the easement, including all surface mining. If the easement donor does not own all of the mineral rights, the possibility of surface mining must be determined “so remote as to be negligible.”
- Resource data documenting the condition of the property must be collected prior to donation of the easement.
When a conservation easement meets these federal requirements, and the donor of the easement demonstrates the value of the easement by a detailed appraisal, the donor may be entitled to a reduction in income and/or estate taxes.
The value of the easement 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.
Landowners donating conservation easements may deduct the value of the easement against 50 percent of their adjusted gross income, or AGI, for 15 years, in addition to the year in which the easement is completed. Landowners who earn more than 50 percent of their income from agricultural operations may deduct the value of the donated easement against 100 percent of their AGI. Farm and ranch corporations may also be eligible for the 100 percent deduction.
Conservation easements will ordinarily result in a reduction of the property value for estate and gift tax purposes, and can ease the financial burden of passing the property onto heirs, making conservation easements a significant and useful estate planning tool. An additional estate tax incentive for conservation easements can further reduce the taxable estate by up to $500,000.
How to donate an easement:
Once the decision has been made to donate a conservation easement, the landowner and the land trust agree on specific terms, keeping in mind the federal requirements above.
Once the easement is finalized, the land trust and the landowner begin a working relationship to assure that the intended conservation becomes a reality. The easement limits only the broad parameters of land use, such as subdivision and construction, while the landowner continues to preside over day-to-day property management decisions.
Annual monitoring visits are conducted by land trust stewardship staff to foster good communication with the landowner and provide an opportunity to answer questions or respond to concerns. Mutual respect and clear understanding of easement terms help avoid potential conflict and allow for the continued use of this excellent tool for conservation of important lands throughout Montana.
For more information about easements and the work being done in Big Sky, please contact Jessie Wiese at The Montana Land Reliance at firstname.lastname@example.org.
The Montana Land Reliance (MLR) partners with private landowners to permanently protect agricultural lands, fish and wildlife habitat and open space. MLR serves all of Montana with satellite offices in Bigfork, Bozeman, Big Sky, and a main office in Helena.