If you own land that you want to pass on to your heirs, but you also want to make sure that some historic, scenic, or agricultural value will be maintained and not destroyed by future development, you might be able to accomplish this with a “conservation easement”…and also save taxes at the same time.
A conservation easement is a restriction on your land that says it can never be developed in certain ways. When you create such an easement, you give it to a charity – usually one that has been created to preserve some historic, scenic or agricultural heritage. In some cases you can also give the easement to a government agency.
After that, the charity or agency has the right to enforce the easement and prevent such future development.
Despite giving away the easement, you still own the land and you can engage in any activities there that aren’t prohibited by it. You or your heirs can also sell the land, although any buyer will be subject to the same easement.
There are two big tax advantages to a conservation easement. The first is that it’s a charitable contribution, so you can take a charitable deduction on your income taxes. Second, the easement reduces the value of your property, because instead of your property being valued based on its potential for development, it has to be valued subject to the easement. So when you pass away, the value of your estate will be smaller, and your family may have to pay less in estate taxes.
The big drawback to a conservation easement is that it’s forever – so if your heirs someday decide they want to sell the property for development, they won’t be able to.
Recently, a federal appeals court in Washington, D.C. issued a decision that makes these easements easier.
The case involved two row houses in a historic district in Washington. The owner gave a “façade easement” to a charity interested in architectural preservation. The easement stated that the historic façades of the buildings could not be changed. However, the agreement also said that the charity had the right to consent to such changes if it chose to do so at some later point, even if they weren’t historically consistent with the area.
The IRS claimed that this wasn’t a real conservation easement because the charity had the option not to enforce the deal.
But the court sided with the taxpayer. It said the fact that the charity had the ability to agree to necessary but unforeseen changes in order to make the property livable and useable for future generations didn’t undermine its essential purpose.
This flexibility should help preserve the value of easement land, and make charities more willing to make such agreements, without losing the tax advantages for landowners.
What if you want to keep a farm, ranch, or similar property in the family for a number of years, but you don’t want to completely give up the right to develop it in the distant future? You might still be able to gain an estate tax advantage with something called a “special use valuation.”
This valuation allows an estate to value land for tax purposes based on its current use for farming or ranching, rather than its presumably much higher value for development. To obtain this valuation, your heirs have to promise not to develop the land for a certain period of time. (If they break this promise, the IRS can come back and collect additional taxes.)
The special use valuation is not a charitable contribution, and while it might save on estate taxes, you won’t get an income tax deduction. However, it provides more flexibility for your heirs down the road than a permanent conservation easement.