Conservation Easements and Preservation of Open Space
A Conservation Easement is a technique that allows the owner of a larger tract of land to preserve open space, obtain an income tax benefit now and save Federal Estate Tax later. Under the appropriate circumstances, it could enable a family to preserve the family homestead, which might otherwise have to be sold to pay Federal Estate Tax. Federal Estate Tax is generally due within nine months after the death of the owner of real estate. The tax rates can be as high as 40 percent! Where the property must be sold promptly to provide funds to pay the tax, the family might be forced to accept less than full value. Worse, the family might have to sell land that they had hoped to keep in the family for future generations and see the family homestead broken up and developed in a way that they never intended – contributing to "suburban sprawl" instead of remaining open space.
The Federal Tax Laws have permitted owners of certain tracts of land to use conservation easements to preserve land from development. The landowner gives up the right to develop the land. The landowner can give up the development rights to only part of the land and retain the right to develop other parts of the land. The "gift" of these development rights to a qualified charity, if all the legal requirements are met, provides an income tax deduction to the landowner. The value of the gift is measured by the value of what is given up, and this forms the basis for the income tax deduction. The landowner not only receives this tax benefit but also benefits the public by preserving the land from development.
The landowner’s estate later receives a second tax benefit – a Federal Estate Tax benefit. Because the land is worth less without development rights, as contrasted with land that could be fully developed, the estate receives the benefit of the lower value in determining how much Federal Estate Tax is due to the government. In addition, the Taxpayer Relief Act of 1997 provided a new tax benefit - an exclusion for the value of land subject to this kind of conservation easement, if all the requirements are met. An "exclusion" means that a certain part of the land is considered as if the estate did not even own it when Federal Estate Tax is calculated, thus saving tax dollars for the family.
For persons dying on or before December 31, 2012 or thereafter, up to $500,000 might be excluded from Federal Estate Tax. These dollar figures are the maximum allowable exclusion – the actual amount excluded is based upon a percentage formula set forth in the law. The formula is somewhat complicated for this brief explanation.
The specific benefits from the use of a conservation easement are different for each landowner. The technique is not available for all landowners. There are many other provisions in the tax laws that must be considered. Some provide other tax-saving alternatives, some limit the value of the benefits from the use of conservation easements and others are interrelated with the conservation easement provisions and must be considered by the landowner in selecting various legal options. Consultation with an attorney familiar with conservation easements is a necessary first step to take advantage of the benefits.
Warning: The description of Conservation Easements is provided here for informational purposes only and does not constitute legal advice. A landowner’s particular circumstances may affect his or her eligibility, tax benefits and tax obligations. You should consult with an attorney in the state where you reside or where you own real estate to determine your eligibility and the effect of a Conservation Easement on your personal situation, before acting on any information contained here.
Copyright 2011 - 2014 Marc H. Jaffe