Granting an easement to some portion of the bundle of rights associated with land is the most common method of protecting land from development. But the process of creating and transferring an easement is probably one of the most mysterious concepts among those who own farm and forest land. Since it is easier to ignore something you don’t understand than it is to learn about it, most land owners shun the very concept of deliberately changing the title to their lands. These same individuals understand the threats to land from people who want to build houses, but the thought of forever restricting the use of their land is just too frightening. Notwithstanding, the use of easements to transfer development rights to a charitable organization that agrees to never exercise those rights is arguably our last hope of keeping productive lands intact and in the family.
Easements come in two forms: private and public. A private easement -- usually between abutting owners, but not necessarily – is a fairly common method to allow others access rights to land. For example, an abutting owner may need to cross the corner of a neighbor’s property with a sewer line, or a portion of a driveway. The abutter would ask his neighbor for permission, but to make sure the right stays with the property and not just the owners, he would also exercise an easement. Such an easement, whether it is a sewer line or a driveway, might also be called a “deeded right-of-way.” Usually the person requesting the easement also agrees to pay for all legal expenses, including the costs of filing the new deeds in town records.
Since easements stay with the affected land titles, they are almost always permanent. Yes, it is possible to set conditions on an easement so that if a title-holder that benefits from an easement violates terms the easement is revoked. But such conditional easements are rare, mostly because people forget. The important thing to remember about a private easement is that one title benefits while the other does not, even though a lack of benefit is not necessarily a detriment. The sewer line crossing a corner of a neighbor’s property, for example, should not in any way detract from property value.
A public easement is one that largely benefits society. When a farm or forest owner transfers the development rights to a qualified organization, the easement that encompasses those development rights have no value to the organization that agrees to accept them. Why? Because the organization also agrees to forever hold the development rights and to ensure that all future title-holders will abide by the easement conditions. In other words, the land will always be used for farming or forestry purposes, but more importantly the land will never be developed.
What sort of organization would accept development rights and also agree to protect and hold those rights forever? Only one that is capable of separating the legal and beneficial interest in property. Also known as a land trust, there are few institutions that have been so grossly misunderstood by people who own and love the land.
Land trusts are a product of the late 1960s when the emergence of suburbs had a profound impact on land values, compromising the ability of farming and forestry – even on the very best soils – to keep pace. Land trusts emerged not as a left-wing conspiracy to usurp the sovereignty of private property, but as a way to maintain working landscapes. Eventually, some of the more innovative land owners – especially those whose lands were imminently threatened with conversion to more developed uses – explored the workings of their local land trusts. Others simply sold out to the developers – even lands that had been in the family since settlement – pocketed the profits and moved on.
But why would anyone knowingly dump half or more of the fair market value of their land by granting an easement that transfers development rights to a local land trust? Love of the land and ensuring one’s family maintains its connections to land can only account for some of what inspires those who transfer development rights. Lucrative tax savings on the ‘charitable contribution’ of such easements simply sweeten the deal. Here’s how it works:
Although land trusts have been known to buy properties they consider critical to their mission, then strip the property of its development rights and resell the land to a buyer looking for productive farm or forest, most trusts rely on gifts. Land trust projects are usually initiated by land owners exploring their options. With a solid prospect, the land trust will spend a great deal of time discovering the current owner’s goals and concerns, and then they propose an easement that fits. When a deal is imminent, the land is appraised first at fair market value then with the easement in place. The difference between the two appraisals is the value of the easement.
Depending on development pressures, the easement’s value could be half or more of fair market value. When the owner (donor) grants the easement as a charitable contribution to a qualified organization, the value of the gift offsets the donor’s taxable income. For most donors the gift can offset up to 50 percent of their adjusted gross income (AGI) in the year a gift is made. Any unused benefits are carried over – at the same rate (up to 50 percent of AGI) – for up to an additional 15 years, virtually ensuring that most farm and forest owners will receive the full tax benefit of their easement gifts.
Furthermore, if the donor is a ‘qualified’ farmer or rancher (including forest owners), the deduction is 100 percent of AGI, deductible under the same ‘carry-forward’ guidelines mentioned above. A ‘qualified’ donor is someone who receives more than half of their income from farming, ranching and/or forestry activities. Thus a qualified tree farmer (who earns at least 50 percent of income from tree farming activities) can completely offset all taxable income from the gift of an easement to a land trust (or other ‘qualified’ organization) in the year of the gift and for the next 15 years or less if the value of the gift is fully recovered. Before September 2006 the deduction was limited to 30 percent of AGI and the carry-forward period was only 5 years. One caveat: the changes expire at the end of 2007 (see included ‘Conservation Easement Income Tax Deduction Expansion).
The tax advantages of giving an easement are twofold: it lowers income tax liability while you are alive (as described above) and it can lower or eliminate estate tax liability after you are gone. Because the fair market value of the property has been lowered by the value of the easement, property taxes should be lower. This is not often the case, though, and the point has not been argued enough in courts to have established precedence. Still, if you have given an easement that encompasses development rights, your property assessment should be substantially lower.
Local taxing authorities are reluctant to lower the assessment on protected lands because land trusts do not pay taxes on easements they hold (and why should they since the easement in their hands is a liability because of the promises they made to the donor). The nature of conservation easements means they have no market value, since the trust cannot sell the easement. From the town’s perspective, it is as though a portion of its grand list has evaporated. Nevertheless, most authorities on the subject agree that the dilemma of how to tax protected lands will be resolved as more and more communities address the question of fair taxation on farm and forest lands.
In the 1990 Farm Bill, Congress created the Forest Legacy program to “protect environmentally sensitive forest lands.” It represented a first attempt to use federal dollars to purchase conservation easements on private lands. Generally, the purpose of easements is to restrict development on productive forest lands and to protect forest ecosystems while also requiring owners to employ sustainable practices. First funded in 1992, the program now encompasses conservation easements in 26 states and territories. To date the U.S. Forest Service has spent $132 million to obtain conservation easements on more than 600,000 acres of forest land with a combined market value of nearly $270 million. In addition to the states and territories where Legacy lands are located, 16 other states have either been authorized to establish Forest Legacy projects or such authorization is pending.
Legacy lands decisions are made by state forester-appointed Forest Legacy committees in authorized states. Although specific criteria vary by between states, decisions are usually based on a combination of: local needs, the degree to which proposed forest lands are threatened, public support for projects, and how well any given project complements other nearby conservation efforts. The U.S. Forest Service and state Forest Legacy committees underscore that the program is intended to support private ownership of forest lands and participation is completely voluntary. As with conservation easements that are sold or given to local land trusts, the donor still owns the forest and can sell or bequeath the land to prospective owners who agree to abide by the terms of the easement. The program is open to any private forest owner in authorized states and designated Legacy areas.
The tax advantages of conservation easements – even those created under the Forest Legacy program – are now in jeopardy, thanks to a recent report of a Congressional Joint Committee on Taxation. Reacting to reports of abuses (associated with easements on the facades of historic houses, and stories of developers using tax savings on easements to finance sub-divisions), the committee has proposed limitations on using such gifts as charitable contributions. It has taken the position that most conservation easements are nothing more than tax loopholes for the wealthy. And so legislators are contemplating limitations on gifts for conservation purposes so that only easements which “benefit a specific government conservation program” will allow donors to deduct 100 percent of the gift’s value. The changes are intended to raise revenue while putting an end to a developer’s ability to “finance the building of subdivisions and golf courses with the tax savings of a conservation easement.” But – significantly – such changes will most likely have little or no impact on farm and forest owning families whose intentions are to keep productive lands intact.
