We all have driven down a road and seen a beautiful field with aspen trees along the edges, a babbling brook and of course a great mountain view. Seen from the eye of a developer, it looks like a great piece of land for 25 homes because the zoning is just right, utilities are close by, etc. Now pretend you are the owner of that land. You bought it 25 years ago to help with your future retirement. The future has now arrived and you want to “cash in”, but at the same time you….and everyone who has driven by and enjoyed that view…would love to keep that pretty piece of land “open space” for generations to come.
A Conservation Easement could be the very tool that can solve the dichotomy between keeping land open & undeveloped yet still allowing the owner to obtain the financial rewards that they deserve. Here is how it works: There are 2 parties; the owner of the land and the recipient of the Conservation Easement. The recipient is a charitable organization (a 501(c)(3) corporation) whose sole purpose is to preserve open space & view corridors as well as to hold the easements. In Durango we have just such an organization: La Plata Open Space Conservancy. Let’s say that the parcel of land is 40 acres in size. As a general rule, you can carve out a 4 acre piece (10%) and in that area you would have to build all of your improvements; house, garage, barn, tennis courts, etc. The rest of the land you would agree to leave natural. You CAN still use it for pasture, crops, etc….just no buildings. A conservation easement does not require a landowner to open his property to the public. It is a permanent grant and when the property sells or is inherited, the easement is binding upon all future owners.
Tax Benefits of Conservation Easements
The federal government and the State of Colorado recognize the positive impact of conservation easements. To help encourage the voluntary creation and donation of the easement, both governmental entities have created financial incentives for the land owner. Please understand these are all general statements, I am not giving tax advice and an experienced tax advisor and attorney will be required to make sure you “jump through all of the appropriate hoops” correctly. As your Realtor, I am just one member of the team.
Federal Income Tax Deduction
The benefit here is a charitable gift deduction for the full value of the conservation easement. Depending on the appraised value of the easement, you can write off up to 50% (was 30% until August 2006) of your Adjusted Gross Income (AGI) per year with the ability to carry forward the unused balance for 5 years…and in some instances up to 15 years. Farmers and ranchers are now allowed to deduct up to 100% of their AGI.
Colorado State Income Tax Credit
This is a dollar for dollar tax credit against Colorado income taxes. The tax credit is equal to the fair market value of the easement for the first $100K plus 40% of the remaining value of the easement. Up to a maximum credit of $260K. Starting in 2007 the credit increases from 40% to 50% with a cap of $375,000. Unused credits can be carried forward but more importantly for some…they can be sold.
Federal Estate Tax Deduction and Exclusion
Since the grantor of the easement has now limited the future use and development of\the property, the value will go down initially. For estate valuation purposes, the lowered value could be very helpful. In addition, the 1997 federal Taxpayer Relief Act added another benefit: An exclusion from estate tax of up to 40% of the value of land subject to a conservation easement, up to $500,000. This exclusion can be taken in addition to the above described deduction and can be taken by each succeeding generation of heirs of the original easement donor as long as the land remains in the family.
State Property Tax Benefit
In Colorado, property classified by the county assessor as “Agricultural Land “ is taxed at a much lower rate than “vacant land”. In order to qualify for ag status, legitimate income must be derived from agricultural endeavors. If the property simultaneously has an ag status and a conservation easement , the owner is allowed to cease ag operations for a period of time and NOT loose the tax advantaged ag status.
Clearly you can see some benefits in this procedure. You need just the right piece of land and you need to be willing to give up development rights. While not for everyone, this tool could be a huge benefit for some people.