2.1 How is a conservation easement valued? Conservation easements are valued through a conservation easement appraisal. A conservation easement appraisal is basically two appraisals of the property – an appraisal of the property in its current (unencumbered state) and an appraisal of the property in a hypothetical restricted state. The hypothetical restricted state assumes that a deed of conservation easement encumbers the property. The difference between the two appraisal values is the conservation easement value and is the basis for which the landowner is compensated.
2.2 What effect does a conservation easement have on the value of the property? A conservation easement will typically reduce the value of a property between 35% and 65% depending on the restrictiveness of the deed of conservation easement, location and type of property. NOTE: the value of the property will continue to appreciate after the conveyance of the conservation easement. However, the appreciation of the value of the property will be on the reduced value of the property once the conservation easement is conveyed.
2.3 How much does it cost to convey a conservation easement? Typically, the conveyance of a conservation easement requires the following reports to be produced in support of the conveyance:
- A baseline inventory report documenting the natural resources and human activity on the property.
- An appraisal to determine the value of the conservation easement.
- A mineral remoteness assessment to determine the likelihood of mineral extraction.
- Title work.
- An occasional environmental assessment.
There are other fees associated with the conveyance of a conservation easement including a project coordination fee, stewardship endowment contribution, state tax credit fees, and various legal fees. Together, these fees typically range from $68,350 to $157,700 depending on the complexity of the transaction. Bargain sale transactions tend to be more expensive due to the increased complexity involved with funders and the additional due diligence requirements.
2.4 What are the differences between a donated conservation easement and a purchased conservation easement? What is a bargain sale easement? Donated conservation easements occur when landowners donate the full appraised value of the conservation easement to the land trust and in return they are compensated through the federal and state tax incentives described in detail below.
A purchased conservation easement occurs when a land trust pays for a portion or all of the value of the development rights. Due to limited financial resources, purchased conservation easements are less common than donated conservation easements and are frequently subject to additional restrictions.
Bargain sale conservation easements are a type of purchased conservation easement that employs both a purchase and donation component. Landowners are paid in cash for the purchased portion (typically 50% or less of the overall value of the conservation easement) and compensated through the tax incentives described below for the donated portion.
2.5 What financial incentives can I expect to receive from granting a conservation easement? There are five types of financial benefits that can accompany a conservation easement:
- Federal tax deductions.
- Estate tax benefits.
- State tax credits (only available in certain states).
- Property tax benefits
- Cash (occasionally).
We will explore each in detail below.
1. Federal Tax Deductions – A conservation easement may be treated as a charitable gift, making the value of the easement tax deductible. In order to qualify for the federal tax deduction, the easement must be:
- Perpetual
- Held by a “qualified conservation organization”
- Serve a valid “conservation purpose,” which includes:
- the preservation of land areas for outdoor recreation by, or education of, the general public;
- the protection of a relatively natural habitat of fish, wildlife, plants, or similar ecosystem;
- the preservation of open space (including farmland or forest land); and/or
- the preservation of a historically important land area or certified historic structure.
In addition, the value of the conservation easement must be determined by a “qualified appraisal.”
The federal tax incentive for conservation easements allows a landowner to deduct the easement’s value up to fifty (50) percent of his/her adjusted gross income, with a fifteen (15) year carry-forward period. Qualified farmers and ranchers are allowed to deduct the easement’s value up to one hundred (100) percent of their adjusted gross income, with a fifteen (15) year carry-forward period.
2. Estate Tax Incentive – Another important tax benefit is the reduction of estate taxes. Because estate taxes are based on the highest economic use of the parcel, these taxes can be substantial even if the land is being used as a farm or ranch. This can put considerable financial strain on heirs and in many circumstances may force them to sell all or part of the land in order to pay estate taxes. Conservation easements can help prevent this and aid in the intergenerational transfers of intact properties.
By granting away development rights the value of the land is decreased, which lowers the value of the land for estate tax purposes, and can provide a significant reduction in the estate tax burden on family members. This is particularly helpful in situations where the cultural, sentimental and historical uses of the land are much more important to the heirs than its economic value. In addition to this decrease, qualified conservation easements can earn an additional $500,000 estate tax exemption.
3. State Tax Credits – In certain states, donors of conservation easements are eligible for conservation easement tax credits. These are credits that may be used against state income taxes owed. Conservation easement tax credits may be used by the donor to reduce state tax liabilities or in some states they can transferred to other taxpayers.
4. Property Tax Benefits – It is important to note that granting a conservation easement WILL NOT eliminate property tax burdens and the property will remain on the tax rolls. It is also important to note that the landowner retains responsibility for any property tax liabilities. South Dakota taxes agricultural land based on a productivity model; therefore, a conservation easement will most likely not affect taxable valuations.
5. Cash – Occasionally, land trusts are able to raise money from public and private funding sources to purchase a portion of a conservation easement with cash. This is known as a bargain sale conservation easement conveyance. Typically, 50% of the value of the easement is purchased in a bargain sale transaction. The remaining 50% is treated as a donation and compensated through the various tax benefits described above. Bargain sale transactions come with additional restrictions required by funding sources that are putting money towards the purchase of the conservation easement. Bargain sale transactions also typically take longer to complete.