Landowners may voluntarily elect to protect natural resources located on their property via a conservation easement. These resources may include agricultural, water, wildlife habitat, open space, historic site and/or scenic view resources. This deed restriction device not only serves to protect natural resources over an extended period of time, even as land changes ownership, but also qualifies the landowner for certain tax benefits. Both the conservation and tax benefit aspects of a conservation easement will be discussed briefly below.
Conservation Easement Overview
A conservation easement is a negotiated agreement between a landowner and certain nonprofit or governmental entities that are qualified to monitor and enforce the land use restrictions of the easement, all pursuant to certain federal and state regulations. There are several qualified organizations in Tennessee , most notably The Land Trust for Tennessee
Restrictions
The restrictions in a conservation easement generally prohibit uses of the land that may adversely affect those resources that the easement intends to protect. For example, subdivision, development, significant commercial use (other than agriculture), clear-cutting of timber, strip mining, and billboard advertisements are commonly prohibited. Landowners are routinely able, however, to negotiate terms that will allow them to own, occupy, and perform a variety of activities on the property. These permitted activities may include, without limitation, residential occupancy, construction of new residential structures, construction of new agricultural structures, farming, hunting, camping, private airstrips, and equestrian activities.
All restrictions are negotiable. To the extent a landowner considers the restrictions to be overly burdensome, the landowner may chose to submit a portion of its property to the conservation easement and exclude another portion to allow unrestricted development or other uses.
Duration of Conservation Easements
Conservation easements are recorded in the public land records so as to be binding upon the then-current landowner and its successors in interest to the subject real property. That is, once a landowner has placed a conservation easement on its property, anyone purchasing or inheriting the land from that landowner will also be bound by the restrictions contained in the easement. The term of the easement is typically perpetual in nature, and the qualified grantee has no obligation to amend the restrictions should a landowner's desired use of the property be prohibited by the restrictions. As such, the negotiated restrictions in a conservation easement should carefully reflect the long-term use and development plans of the landowner.
Easements may be terminated either by eminent domain (condemnation) by a governmental authority or by a court upon determination that the original intent of the parties is no longer achievable due to a change in circumstances.
Tax Consequences of a Conservation Easement
There are several tax benefits available to a landowner who donates a conservation easement to a qualified organization. These benefits are:
• A charitable income tax deduction equal to the value of the donated easement;
• A reduction in the value of the land subject to the easement included in the landowner's estate for estate tax purposes;
• An exclusion of up to 40% of the value of the land (but not improvements) subject to the easement from the landowner's estate for estate tax purposes (successive generations in a single family will be entitled to the benefit of the exclusion where the land subject to the easement is passed down from generation to generation); and
• A possible reduction in annual local real property taxes, as determined by the local tax assessor.
The charitable income tax deduction generated by the donation of a conservation easement is equal to the fair market value of the easement at the time of the donation. Usually no substantial record of sales of comparable easements exists with which a fair market value can be determined. Accordingly, the fair market value of an easement generally should be equal to the difference between the fair market value of the property subject to the easement before the donation, and the fair market value of the property after the donation. This number is arrived at by a qualified appraisal of the property.
There are certain limitations on claiming the charitable income tax deduction, as well as other requirements that the landowner must meet in order to qualify for the multiple tax benefits afforded by the donation of a conservation easement.
Drawbacks of Conservation Easements
There are several drawbacks to placing a conservation easement on property. A landowner's intended use of the property may include wide-scale development or subdivision for commercial or residential use, both of which will be prohibited. Further, a conservation easement will significantly reduce the marketability of property to developers. Finally, a landowner may not be able to take advantage of all of the possible tax benefits of a conservation easement.
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* TRELL thanks Susan Foxman of Bass, Berry & Sims, PLC for preparing this article
