Conservation Easements Protect Open Land

Conservation easements are increasingly being seen as the most reliably successful means of preserving Virginia's vanishing family farms and other open-space private lands.

Conservation easements are partial interests in land by which a landowner conveys to a charity or government agency the right to restrict the use and development of his property, usually in perpetuity. Title and all other rights in the property -- rights to sell, gift, bequeath -- remain with the landowner, as does the right to use the land in any way that doesn't harm its recognized conservation values.

An easement holder such as the Capital Region Land Conservancy or the Virginia Outdoors Foundation ensures that the protective terms of the deed of easement are adhered to over time.

People donate conservation easements because they love their land and want to permanently protect its scenic beauty, wildlife habitat, historic integrity, or its ability to provide a livelihood through farming or forestry. Easement donation constitutes an economic sacrifice because easements nearly always reduce the market value of real estate.

But if you truly care about your land, it's probably not going to feel like you're giving up much when you donate an easement. One way to look at it is this: You're giving up something you didn't really want anyway -- the right to destroy the qualities that make your land special to you.

Easement donations work only if donors are concerned primarily with protecting their land from development, and landowners should look to the available tax incentives as a way of partially offsetting the cost of that protection. State and federal tax benefits are available to easement donors because governments recognize that the preservation of farms, forests, wildlife habitat, and historic sites is in the interest of the general public.

The extent to which an easement donor can potentially benefit from the various income and estate tax incentives depends on their financial situation, and anyone considering an easement donation should consult professional advisers. That said, the following list summarizes the more important tax benefits available to donors of easements that qualify under applicable law:

• Federal charitable income tax deduction: The deduction, generally equal to the easement value (the pre-easement property value minus the post-easement property value), can be used to reduce the donor's adjusted gross income by up to 50 percent (or 100 percent in some situations) per year for 16 years or until it's used up.

• Virginia land preservation income tax credit: The state tax credit can be used to offset the donor's Virginia income tax liability dollar-for-dollar, and any unused credit can be sold to other Virginia taxpayers. The ability to sell the credit makes it particularly attractive to easement donors who do not have significant Virginia income tax liability, such as "land rich and cash poor" farmers.

• Estate and gift tax benefits: The donation of a qualifying conservation easement will not have gift tax consequences and will remove the value attributable to the easement from the donor's estate for estate tax purposes. An additional exclusion of up to 40 percent of the value of the encumbered land from estate tax may be available as well. Given the complexity of these programs, it is important to consult experienced professionals when undertaking a conservation easement.

Here's a quick example illustrating the benefit an easement donor might realize from the Virginia land preservation tax credit. Let's assume that your 400-acre farm, located in an area where suburban sprawl is starting to occur, is worth $1 million. That's the price at which you realistically could sell your farm as developable property.

We'll also assume your land has significant conservation value (whether for farming, forestry, wildlife habitat, or scenic or historic value), its perpetual protection is consistent with your county's comprehensive plan, and the easement you're donating prohibits subdivision and most commercial uses other than agriculture and forestry. It allows you to maintain or expand your existing house and build a guest cottage nearby, as well as another house elsewhere on the property.

Your appraiser estimates that the easement will reduce the value of your land from $1 million before the donation to $600,000 afterwards. Thus, the value of your easement is the difference, or $400,000.

If the easement qualifies under applicable law, you will be entitled to a transferable land preservation tax credit equal to 40 percent of the value of your easement, or $160,000.

Most easement donors save a few years' worth of their credit to pay their own state income taxes and sell the rest to other taxpayers through professional intermediaries.

However landowners choose to apply their tax credit, it is a compelling incentive for those wishing to protect our countryside and Virginia's rural heritage for succeeding generations.

William H. Funk is an easement specialist at Conservation Partners LLC in Lexington and may be contacted at (540) 458.3664 or at wfunk@conservationpartners.com, or visit www.conservationpartnersllc.com.