The Conservation Easement Bonanza: Liberals like this tax provision because it protects the environment, conservatives like it for the tax breaks, and landholders and investors are reaping financial benefits
- April 1, 2017; Vol. 4, Number 4

The Conservation Easement Bonanza: Liberals like this tax provision because it protects the environment, conservatives like it for the tax breaks, and landholders and investors are reaping financial benefits

by Bryan Kelley

What do the likes of Hollywood household names such as Steven Spielberg, George Lucas, Robert Redford and Harrison Ford have in common with business leaders such as Ted Turner and T. Boone Pickens? They all have been generous donors of conservation easements that protect land from future development in perpetuity. While their respective reasons for protecting land may vary, many people are drawn to protect their land because donating a conservation easement is quite often the perfect blend of doing good while reaping some financial benefit.

As our country experiences an ever-shrinking rural environment, donating a conservation easement is often seen as providing the ideal “win-win” tool for both landowners and conservationists. The popularity of donating conservation easements has grown exponentially over recent years. According to a recent Land Trust Alliance census, almost 17 million acres have been conserved across the country as a result of conservation easement donations and this reflects an increase in conserved acreage of more than 175 percent in the last 10 years.

So what is a conservation easement? At its core, a conservation easement is a voluntary, legally binding agreement undertaken by the landowner that limits the future use, modification or development of land forever. The practical result of most conservation easements is to reduce the scope and type of development on the property, if not eliminate development altogether. The conservation easement can then be donated to an entity, usually a nonprofit organization (such as a land trust) or government organization. While the donee enforces the terms of the conservation easement, the landowner retains ownership of all rights not modified by the easement.

The ecological benefits of conservation easements are critical and substantial. Present and future generations will benefit from conservation easements that safeguard watersheds and water quality, protect threatened species and wildlife habitat, preserve open space and agricultural lands, and ultimately enhance the quality of life in expanding urban and suburban areas. Conservation easements provide meaningful contributions to the fabric of our landscape and environment.

Altruism alone, while a powerful motivator, however, does not explain the increase in donations of conservation easements over the past 10 years. This is where the tax code comes into play. Under the Internal Revenue Code Section 170(h), if the value of the property is diminished by the donation of the conservation easement, the landowner may claim the diminished value in the form of a tax deduction. As always, the devil is in the details, but so is the reward.

Under Section 170(h) there are many detailed rules and regulations that must be strictly followed to benefit from the tax deduction. First, the conservation easement must further a specific conservation purpose, as identified in the statute, which are included in the accompanying sidebar below.

In addition to meeting a conservation purpose, there are many other issues to consider. A properly drafted conservation easement is an art form, and it certainly requires careful attention to detail. This is a task ideally undertaken with experienced legal, accounting and land-use professionals. The landowner is advised to carefully vet the land trust or organization being considered as a donee of the conservation easement. Only “qualified organizations” can accept an easement if the donor intends to claim the tax deduction. Specifically, a “qualified organization” (donee organization) must have the means to protect and monitor the eased property in perpetuity, which is, as the saying goes, “a really long time.”

When thoughtfully and properly drafted, a conservation easement is also unique to the property. A well-constructed easement will address the needs and desires of the landowner while protecting the underlying conservation purposes identified in the baseline environmental report, a detailed report that identifies the current environmental attributes of a property. Within the easement, a landowner may reserve certain rights for future use of the subject property as long as these uses do not harm the environmental attributes of the land. Reserved rights on conserved property can include such activities as the right to farm or harvest timber, the ability to hunt on the property, and even the right to live or build on the property in selected areas. It is important to know that a conservation easement need not allow public access to the property, and that the easement may not apply to the entire tract of land.

Notwithstanding all of the prescriptive rules and regulations, landowners continue to donate conservation easements and Congress continues to encourage such donations. In the waning days of 2015, a strong bipartisan effort in Congress made permanent the enhanced federal tax benefits for conservation easement donations under Section 170(h). A landowner can now claim a deduction related to the conservation easement donation that offsets up to 50 percent of the taxpayer’s adjusted gross income (AGI), and any unused deduction may be carried forward for 15 years. Qualified farmers and ranchers may claim a conservation easement deduction and offset up to 100 percent of their AGI.

As an example of Section 170(h) in practice, take a farmer who owns 500 acres of land that has been owned by his family for generations. Unfortunately, his farm lies within a high development pressure area such as those surrounding a major, growing city. As property values increase, pressure is placed on the farmer in the form of an increasing real estate tax burden. Agricultural property that may have an average value of $5,000 an acre in other parts of the state is now worth $25,000 an acre or more to a developer. Instead of paying property taxes on a $2.5 million parcel of land, the farmer is now faced with paying taxes on an increased assessed value of $12.5 million or more. Even with potential state real estate tax breaks for farmland, the tax burden will likely keep increasing as development moves steadily outward and pressures build. Unless independently wealthy, the farmer will eventually have a decision to make. The obvious options are to sell the family property and relocate, develop another income stream from the property, or find a way to reduce the property’s real estate taxes.

One solution is to place a conservation easement on his property. By doing so, he can continue to pursue his chosen profession of farming his family land, and his property value should revert to a more sustainable level since it can no longer be used for any type of development. As an added benefit, he should be able to take advantage of the Section 170(h) tax deduction. In this case, let’s start with the $12.5 million land value prior to the conservation easement. Once the conservation easement is properly donated, let us assume the value of the 500 acres reverts to the previously stated average of $2.5 million. The farmer’s family has avoided a potential estate tax issue, and he should now be entitled to a $10 million charitable deduction that can be used to offset up to 100 percent of his AGI over the next 15 years. Excellent result! Unfortunately, this is often not the reality for farmers who are land rich but have lower incomes.

The U.S. Bureau of Labor Statistics reports that farmers and ranchers earned a median annual income of nearly $61,000 in 2010, and the top 10 percent of earners in the field made about $107,000 per year. These income levels will make it impossible for U.S. farmers to take full advantage of the $10 million deduction they are entitled to use. Even assuming a farmer earns an above average income, earning $200,000 per year, he will only be able to deduct $3.2 million in the current tax year and over the next 15 years. That still leaves $6.8 million of available deductions on the table, unused and, for all intents and purposes, wasted.

Given the limited value of the tax deductions to many farmers in similar situations, the Section 170(h) may simply not provide enough incentive. So what are the farmer’s options? Are those tax deductions wasted? Not necessarily. Through the use of partnership law, a financially stressed farmer can bring in friends, family or even investors who can use a portion of the excess deductions. Partnering with these other individuals may in fact be critical, as the rules and regulations that must be followed in order to generate and claim the tax deduction are onerous and expensive. For example, when all is said and done, the fees (e.g., professional fees and due diligence studies) related to donating a conservation easement can easily reach six figures. Given that the average farmer may not have sufficient resources to even contemplate the donation of a conservation easement and all it entails, bringing in partners may be the only way to accomplish the donation.

But be advised that while bringing in partners can be legally and ethically accomplished, the IRS seems to frown on such arrangements. Notice 2017-10, issued by the IRS in the final days of the Obama administration, identifies certain partnership arrangements that donate conservation easements as “listed transactions” that require participants to file additional disclosures.

The Notice, if left in place by the Trump administration, will leave many landowners, like our hypothetical farmer, with no access to this congressionally sanctioned tax benefit and, ultimately, less land will be conserved for future generations to enjoy. As noted by Randy Bampfield with Partnership for Conservation, a newly formed industry advocacy group, “Partnerships provide an important source of private funding to finance needed conservation projects, especially when the current owner is land-rich but cash-poor and might otherwise be forced to sell to a developer.”

Notwithstanding the IRS’s actions, many continue to forge ahead with these donations. The IRS Notice, although it completely missed the mark in terms of substance, was aimed at the rare potential abuse of Section 170(h), namely when tax deductions are supported by an inflated appraisal of the donation. The fact is that anyone would be ill-advised to donate a conservation easement, whether in a partnership or individually, if they fail to use an appraiser who has the highest level of training, experience and integrity. Indeed, best practices among those who structure such partnerships include employing two or more independent appraisers and using the value of lowest of the two appraisals. Placing an easement, by an individual or any group, should be undertaken with only the most knowledgeable and reputable professionals.

Part of the issue around overvaluation comes from Section 170(h) itself. Easements are required to be evaluated using “highest and best use” of the property. In the case of agricultural land within a development corridor, the property’s highest and best use is seldom as a farm. This does not require that a farm be subdivided or specifically zoned for development before an appraisal can be undertaken. Instead, the appraisal must show that the proposed highest and best use of the property is physically possible, legally permissible, financially feasible and maximally productive. An appraisal that cannot substantiate all of these criteria, and a host of other technical and substantive requirements, cannot and should not be used.

As stated above, donating a conservation easement is quite often the perfect blend of doing good while reaping some financial benefit. Donors of conservation easements, including those landowners who are structured as a partnership, should not be discouraged by the rules and regulations that must be followed in order to properly claim a tax deduction for such conservation easements since the tangible and intangible benefits of conservation are worth the effort.

Bryan Kelley ( is CEO of Webb Creek Management Group.

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