Anyone have experience with conservation easements?

[mikeathens]

My wife and I have been debating whether or not to donate development/subdivision rights on our 85 acres to the local conservancy group. I have read some accounts of others doing the same, but I wanted to see if anyone here at hearth has any experience? We would only be donating our development/gas and oil development rights in order to preserve the land in "perpetuity" (as I heard a lawyer state, "as long as we have a government").

My thoughts are to keep the old farmland from being subdivided (we have 1/4 mile road frontage on both sides of the road, and lots of nice bottom land pasture; probably a developer's dream) and prevent commercial logging and overall destruction of the habitat that has made its return over the past 50 to 100 years. I figured that, with tax benefits from donation, possibly help to pay off our mortgage faster or buy more land as it becomes available. I am not sure how the whole system works, and how to tell what our tax benefits might be (short of contacting an attorney or appraisal company). Any thoughts? I'm looking for real first-hand experience and advice.

 

[saichele]

Although the general program is pretty similar across the country, each state (and sometimes county, or different entities in same jurisdiction) has it's own particulars. you could probably find out what programs are available by stopping in at either your local soil conservation district or county extension office. They may not have a lot, but they probably have a couple handouts.

More philisophically, I'd (if I had any decent amount of land) look at the Nature Conservancy or a similar group as a buyer of the rights. Who's to say - down the road maybe everyone around sells out to strip malls, and it makes more sense to sell your rights and but 500 acres worth somewhere at the edge of town? I don't know your circumstance, but forever is a long time, and things change.

Steve

 

[smirnov3]

See if your town has a conservation comittee - they will have more information.

And I think you are doing the right thing by donating. Especially if everybody around you sells out: a small wooded area like that can serve to connect other wooded areas together, allowing species to migrate from one to the other to find mates & food.

 

[babalu87]

There was a block of land in proximity to me that was supposed to remain open space when a local gun club sold it to another gun club.
That gun club sold the land .......... to a developer......... they are readying 8-10 house lots as we speak. I wouldnt do it, a builders lawyer will probably find a loophole eventually.

 

[Harley]

Mike:

As Steve stated, the programs do differ from state to state, however they all pretty much do the same thing. Essentially, you are giving away (in some cases selling) the right to develop your land. This makes your property "less valuable", therefore your property taxed are adjusted down to reflect that decrease in value. Probably the best person in your town to let you know how much the decrease would be is at the assessor's office. For Federal tax purposes, you would likely need a valid real estate appraisal. If the conservation group is a registered not-for-profit. You should be able to take that amount as a charitable contribution.

Another thing to think about, and often times it can accomplish pretty much the same thing, but I don't know if your state does. (IF you intend for the land to never be developed.... that's great, and what you describe should work out fine. ) If you think your kids or other heirs may need/want the full value of the land someday, many states allow for the land to be taxed and assessed based on an agricultural or "current use" status. You would get the same property tax reduction as the outright gift, the land would be restricted as to development, but its one where you, or your heirs, or another purchaser of the property could change your mind. The only "hitch", is that to pull the property "out" of the "current use" status, is that you have to pay back the town for all of the property tax. Also, you wouldn't get a Federal deduction for charitable contributions.

 

[mikeathens]

Maybe I should have been more specific!! I am actually on the board of the local conservancy. Mine would be the first donation of an easement, so not a whole lot of experience by any of the other board members.

Mine would be a donation of development rights only...this would basically say that no one could subdivide, mine, drill gas wells, build roads, etc, etc on the property. The property could still be sold, select-cut, and used in the way that it is now. From what I understand, my donation would result in a charitable contribution that I could claim over the next 15 years or something. I would also contribute an endowment of $1000 or so to provide money for the conservancy to monitor the property use. This is not a "deed restriction"; this is a permanent easement. I believe that this has been tested in the past and is VERY difficult to violate - I think there was a case up north in Ohio where a municipality tried to gain a sewer easement through a protected farm using "eminant domain" and lost their case.

My reasons are to prevent further fragmentation of the landscape and preserve the neighborhood - I have several 200+ year old oaks, sugar maples, and black walnuts, and many nice rock outcrops and waterfalls. This is also a parcel that retains its original "Ohio Company Purchase" dimensions - 1/8 of a township section of 85 acres. I know that there is great potential for making some $$ from subdivision, but I am not interested in that. I want to "walk the walk" and try to set an example for others, hopefully inspire a few. I get so sick of people claiming to be spome type of environmentalist or naturalist and then go out and subdivide land or hop into their hummer.

Here's a little info on what I'm thinking of - mine would be a donation, though. Having some group "purchase" the easement isn't really a possibility unless I would allow public access - my group relies on grant money for that, and public access is a must. I'm not willing to do that. I am already in the forest tax law program, and will be taking advantage of EQUIP once we get a few goats!

http://www.lta.org/enewsletters/current.htm

 

[cbrodsky]

I have looked into it as well... it is compelling, and we are considering pursuing this option.

A few points to be aware of on the tax side:

You take the (current value) - (new value with restrictions) = deduction amount

You can only deduct up to a certain percentage of your income - I believe 30% - and then you don't pay tax on that part of your income. If you are currently in a high tax bracket, it can be a nice break because you're knocking off income that is taxed at a high rate. On the other hand, if you are in a low tax bracket, the value of that deduction isn't a lot. Additionally, you have a few years to collect the deduction over time - I believe up to 5.

Example 1:

Current value = $200,000
New value with restrictions = $110,000
Your current taxable income after all 401k, itemized deductions, etc. = $100,000
Tax rate of 28% (just guessing)

Your total deduction is worth $90,000. For three consecutive years, you get to deduct 30% of your income, or $30,000 each year. If all of that would have been taxed at 28%, then your total tax savings is $30,000*3 years*28% = $25,200

Example 2:

Current value = $500,000
New value with restrictions = $100,000
Your current taxable income after all 401k, itemized deductions, etc. = $25,000
Tax rate of 10% (just guessing)

Your total deduction is worth $400,000, but you'll never realize much of it. For (I think) five consecutive years, you get to deduct 30% of your income, or $7,500 each year. If all of that would have been taxed at 10%, then your total tax savings is $7500*5 years*10% = $3,750. Not so good considering you "donated" $400,000!

This is a crude example, but illustrates some points that may be big factors for you.

My wife and I only have 19 acres, but in our part of NY, the value is non-trivial. I have debated petitioning to subdivide to define 5 acre building lots to increase the "value" and then turn around and give away those rights. An uphill battle to be sure, but 5 acre building lots are going for $150-$300K in this area. We would then "forfeit" those development rights, devaluing the property back to its current state as one large residential lot which doesn't carry a huge premium over a smaller residential lot. The tax savings would then be plowed back into paying off the house.

If we pursue such a strategy, we will want to do it while we're both working. That situation puts us at a higher income to enable higher potential deduction, and while stuck in a high tax bracket, the value of that deduction is greater.

I would also be very interested in hearing from anyone who has first hand experience with the process.

-Colin

 

[mikeathens]

Thanks, NY Soapstone. I liked your examples - I couldn't quite figure out how to do the calculation. I think you about hit our scenario on the head with your first example...I know, probably a little more complicated than that, but still gets the point across. I wonder if I could "subdivide" and then donate easements on all "lots" like you're talking about? Hmmmmmmmm...maybe more expensive to do with surveying, local recording fees, etc. than I would gain in benefits.

 

[cbrodsky]

Thanks, NY Soapstone. I liked your examples - I couldn't quite figure out how to do the calculation. I think you about hit our scenario on the head with your first example...I know, probably a little more complicated than that, but still gets the point across. I wonder if I could "subdivide" and then donate easements on all "lots" like you're talking about? Hmmmmmmmm...maybe more expensive to do with surveying, local recording fees, etc. than I would gain in benefits.

Well, this is something I haven't gotten a competely straight answer on, and I suspect it varies a lot by assessor, but strictly speaking the appraised value should really be what it's worth today in its current form. For example, in our area, a building lot that has board of health approval for a septic system is worth more because it's immediately ready to build. The same lot without that approval will require time consuming and uncertain results from the tests, and thus sells for a discount. You are right that the cost of the subdivision may not overcome the tax benefit.

As the IRS has made it clear they intend to step up audits/collections, this is clearly an area I'd expect a lot of close scruitiny and focus. It is ripe from gross abuse by having an appraiser inflate the "before donation" value and depress the "after donation" value, so caution is in order.

Also the tax calculation is approximate at best - the rules on these change frequently, but if you dig around on google, you can learn quite a bit on this subject.

-Colin

 

[Harley]

The examples are pretty good... just "tweaking" them a bit. The % limits are based on adjusted gross income, rather than taxable income, which is good, since that is a higher number (its income before the deductions and credits). Also, depending on the structure of the organization receiving the, it could be a qualified concervation contribution, in which case the limit may be 50%, or if you were a qualified farmer or rancher, the limit could be 100% of your AGI.

see:
http://www.irs.gov/pub/irs-pdf/p526.pdf

 

[Eric Johnson]

A few years back I edited a book entitled "The Landowner's Guide to Conservation Easements," by Steven Bick and Harry Haney, published by Kendall Hunt Publishing in Dubuque, IA. It may be out of print, but I know there are still copies available on Amazon. It's a comprehensive look at the topic.

Depending on your situation and goals, conservation easements can make a lot of sense. Sounds to me like you're on the right track.