Real Estate Law Blog

Considering a Conservation Easement? Here’s What You Should Know

Ever looked at a piece of your property and thought, “I wish it could stay like this forever”? If so, you may be in luck, because a conservation easement will protect certain types of property in perpetuity, and there may just be a tax incentive to do so thrown in for good measure. As with any type of property transaction, there are plenty of considerations that should factor into the decision to create a conservation easement, and some of the most important ones are outlined below.

What is a conservation easement?

At its most basic, a conservation easement is a legal agreement between a landowner and a land trust or other charitable or governmental organization for the purpose of “retaining or protecting natural, scenic, or open-space values of real property, assuring its availability for agricultural, forest, recreational, or open-space use, protecting natural resources, maintaining or enhancing air or water quality, or preserving the historical, architectural, archaeological, or cultural aspects of real property.” That language comes from KRS 382.800-860, which authorizes and governs the creation and use of conservation easements. These easements are grants of a property right to a charitable or governmental organization that essentially restricts the use of the designated property for current and future owners, and they are enforced by the organization that’s a party to the agreement.

In Lexington, the Rural Land Management Board governs the Purchase of Development Rights (“PDR”) program, which allows landowners to place agricultural preservation easements on their property. The landowners participating in the program are compensated directly for permitting the easement to be imposed. Nearly 30,000 acres of rural land in Fayette County has been protected via the PDR program. However, the PDR program has certain eligibility requirements, as do most land conservation programs. Thus, it is important to review program requirements before pursuing a conservation easement.

The benefits

In addition to knowing that your land will be preserved in its present use or condition throughout the remainder of human history and potentially direct payment from programs like PDR, there are also potential tax incentives to creating a conservation easement.

In 2015, Congress passed a permanent conservation easement tax incentive to promote land conservation, which makes a donation of a conservation easement a charitable tax deduction, up to 50 percent of the donor’s annual income (certain qualified farmers and ranchers can deduct up to 100 percent). The donor also has a carry-forward period of 15 years to take the deduction.

Additionally, though the land under a conservation easement prohibits certain uses, the owner of the property can still make use of it and sell or give away all or parts of it. These easements are often used to keep land available for farming, but the agreements must be tailored to ensure that the farm can adapt to changing circumstances. Any sold property is subject to the easement, but there aren’t limitations otherwise. The details of any changes in use, subdivision, or sale will of course be governed by the specific program and easement document, and you should carefully review any such agreement to ensure that its requirements match your expectations.

Drawbacks

To qualify for the federal tax deduction, the conservation easement must be permanent. Likewise, PDR easements are permanent. Donors of these easements must take the long view – this easement ostensibly will run for a thousand years or more, and each subsequent owner will be subject to the same restriction. Do you, as land owner, truly want to freeze that specific land or use for multiple generations to come? The creation of a conservation easement creates two different sets of property rights, and the rights of the property owner are subservient to the rights of the holder of the conservation easement; it will remain this way in perpetuity. Though today there may be little potential development value for your property, in the future the ability to develop may be quite valuable. Thoughtful and thorough consideration must be given to the impact of such an easement on future owners or heirs.

Additionally, when making value considerations, it is important to consider that the value of the easement is determined by the loss in the value of the land to which the easement applies – the bigger the loss, the more valuable the easement. This drop in land value may not appeal to those with investment property, and it can cause hardships for those who fall on harder times and need to sell the land, now devalued.

There are transaction and maintenance costs to conservation easements as well – land trusts may require a stewardship fee to be paid along with the donation of the easement, which provides the trust with operating funds to monitor and enforce the easements; these functions are more costly on land used for continued farming. The exact terms could vary substantially between organizations, so it is important to consider all options before making a permanent commitment.

To conserve or not to conserve

The decision to create a conservation easement should not be taken lightly, and the agreement for such a transaction should be drafted with extreme care by experienced professionals. It’s not often that you can leave your mark on the land for generations to come and get financial incentives to do so, but it also helps to be aware of all attendant risks. Once land is developed, it will likely never return to its natural state, but it is likewise challenging to be able to conceive of all potential circumstances that will impact your property forever. Thus, we counsel that you conserve conservatively. Conservation easements could impact your land and estate planning, and the attorneys of McBrayer stand ready to assist you if you are considering donating a conservation easement.

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This article does not constitute legal advice.