Q. If I donate an easement to DU, will it ever be transferred to the government?
A. DU is a private nonprofit organization. It is not affiliated with the federal government or any state or local branch. In the unlikely event that DU should ever cease to exist as a conservation organization, the easement document provides that the easement automatically transfers to another private nonprofit organization that has experience with conservation easements.
Q. What is the responsibility of the owner in the easement process?
A. Each state has its own laws that will determine the legal consequences of a conservation easement. Each prospective donor should consult his or her attorney and tax professional as to the laws of their state and the legal and tax implications of the proposed easement.
The landowner is responsible for obtaining an appraisal of the property. The appraiser will furnish both a market value of the property and a value of the property after a conservation easement has been placed thereon. This difference in valuation may determine the amount of tax deduction allowed. According to IRS rules, if a gift is valued at $5,000 or more, an appraisal must be completed by a qualified appraiser to document the donation. A qualified appraiser is one who is knowledgeable in making appraisals of the type of property donated, who is not the donor or holder. (See Internal Revenue Code, 26 USC Section 170 Et. Seq., and Treasury Regulations 1-170 Et. Seq. for legal requirements.)
A Baseline Documentation Report (BDR) is necessary for all easement donations. The BDR is an inventory of the conservation values of the property, which includes habitat and wetland analysis, as well as suggested management ideas to ensure its protection and highest use to waterfowl and wildlife. It is essentially a snapshot of the property at the time of donation. The IRS requires a donor to "make available to the holder prior to the time the donation is made, documentation sufficient to establish the condition of the property at the time of the gift." (See Treasury Regulations Section 1-170A-14.) A BDR fulfills the IRS documentation requirement, and provides the holder with critical information about the property that is used for monitoring and enforcement. The cost of this report may run several thousand dollars. DU can help the donor to arrange for the preparation of these documents.
Additionally, the landowner will need to obtain a title search or a title opinion from a title examiner or attorney in the area. Title information is necessary to disclose the encumbrances recorded on the land records that might be in conflict with the conservation easement. The cost may be minimal, depending on how long the donor has held title to the property and the number of encumbrances recorded on the land records.
Q. What are the steps in the easement process?
A. A landowner who wishes to donate a conservation easement to DU should contact the nearest DU office. (http://www.ducks.org/about/contact.asp
) A regional biologist will contact the landowner and conduct a site visit to determine if the property contains valuable habitat and if it complements DU's mission. The regional biologist will prepare a short document for use by DU called a Preliminary Property Inspection (PPI) report. The terms in the easement document will then be negotiated between the owner and DU. In the meantime, the owner will arrange for the appraisal, title work and BDR. The process is one of mutual cooperation as both donor and holder are working toward the preservation of valuable habitat. When both parties are satisfied with the terms and the conditions of the conservation easement, it is signed and recorded with the recording clerk of the local county or town.
Q. What if there is a mortgage on the property?
A. An easement, recorded after a mortgage, could be extinguished if the mortgage is ever foreclosed. Mortgages on the property should be identified, and if the donor will be claiming a deduction, a subordination should be obtained. The existing mortgage holders will have to subordinate (make secondary) their rights to those of the easement holder. In other words, the easement has to be first in line. The donor should contact any lenders early in the easement process and obtain a subordination for those mortgages.
Q. What is the endowment fund?
A. DU has the welcomed duty of monitoring and enforcing the easement forever. Of course, this requires funding. DU has established an endowment fund that is set aside for the permanent work of monitoring and enforcing easements. DU will request that each donor make a tax-deductible donation to the endowment fund. This donation is based upon the assessment of the donated easement toward the overall mission of DU. A donation to the fund insures that the owner's wishes will be carried out in perpetuity.
Q. Can I donate an easement in my will?
A. A conservation easement may be granted in a will, but some potential tax benefits may be lost. No income tax or property tax benefits are available, but estate taxes may be reduced. The landowner should negotiate the terms of the easement with the holder, and arrange for a bequest to the endowment fund. The owner should work with his or her estate planning professional to update his or her will with the appropriate instructions for the executor to follow to complete the donation.
Q. What restrictions are contained in a conservation easement?
A. An easement is tailored to fit the particular property based on the desires of the owner and the goals of the conservation group. The only rule is that all restrictions must be consistent with the applicable laws. Typical restrictions eliminate commercial and industrial uses and mining, limit subdivision, roads, homes, other structures and design timber cutting according to best management practices. An easement might prohibit all future development, commonly called a "forever wild" easement. An easement might preserve the land for historic or educational use, or allow a certain amount of development that will not damage the natural value, but help the owner gain economic benefit. For example, Mr. Smith owns a 2,000-acre ranch. He wants to donate a conservation easement but has certain needs for his family and ranch business. Mr. Smith donates an easement that prohibits future development, but he reserves the right to subdivide two lots, one for each child on a specified portion of the ranch, and to build additional feeding structures and storage buildings for the ranching operation. He also reserves the right for his family and himself to hunt and fish the property. Mr. Smith has protected his land but also reserved the rights necessary to continue his ranching operation and pass it on to his children.
Q. What are the estate tax benefits?
A. Property passed by will or by law upon the death of the owner is subject to estate or inheritance taxes. Federal estate taxes are based upon the current fair market value of the property, and range from 28 to 55 percent. Most property values appreciate, or increase, over time. When the landowner dies, the fair market value of the property is assessed at full value for its highest use, usually development. Estate taxes may create a tax burden for heirs. If the estate is "land rich and cash poor" the tax could force heirs to sell the property. A conservation easement can be the ideal technique to reduce the value of an estate and possibly lower the estate tax burden. If a property is restricted during the owner's lifetime, only the restricted value of the property is included in the estate. For example, Mrs. Smith owns a 1,000-acre farm that was bought in the Depression for a few dollars an acre. In the real estate market today, the land would bring at least $1,000 per acre. Her estate value is more than $1 million in real estate alone, and could have tax liability. She decides to donate a conservation easement on the property. The appraisal values the property at $1 million unrestricted, and $500,000 restricted by the conservation easement. Her estate value has been reduced by $500,000, enabling her to significantly reduce her tax burden and possibly help pass the farm to her children.
Q. What are the income tax benefits?
A. To qualify for a tax deduction, one requirement is that a conservation easement donation must be a charitable gift as defined by the IRS. The donation must be made to a qualified charitable organization and, if worth more than $5,000, documented by a qualified appraisal. The maximum charitable deduction is set by federal tax law at a percentage of your annual adjusted gross income (AGI). In some states, there is also a deduction or credit against state income taxes for the donation of an easement. In 2015, Congress made permanent the enhanced federal tax incentive for conservation easement donations. Generally, the donor of appreciated real estate (most conservation easement property is long-term capital gain property) may be allowed to deduct up to 50 percent of adjusted gross income in one year. The excess value of the gift may be carried forward for 15 additional tax years. Qualifying farmers and ranchers may deduct up to 100 percent of their income, provided the land remains available for agriculture. These benefits were signed into law on December 18, 2015, and the terms apply to donations made at any time in 2015 and to all donations made after that.
For example, the 2015 rules allow a landowner earning $50,000 a year who donated a $1 million easement to deduct $25,000 for the year of the donation and then $25,000 per year for an additional 15 years. That's a total of $400,000 in deductions. If the landowner qualifies as a farmer or rancher, he or she could take a maximum of $800,000 in deductions for the million dollar gift.
If the property is ordinary income property, the amount of the deduction is only the adjusted basis of the property. Corporate property also is treated differently, and other rates apply. In some states, the donor also may be entitled to a deduction toward state income taxes. In all cases, the donation should be reviewed with a tax professional or attorney to determine the deductions allowed.
Q. What are the property tax benefits?
A. An easement donor may be entitled to a reduction in property taxes. Property taxes are based on the assessed value of the property, which is usually for its highest and best use. A reduction in the fair market value by easement restrictions should mean a corresponding reduction on property tax. Land restricted by a conservation easement also may be eligible for other tax relief through state or local programs that help forestland and farmland owners.