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Frequently Asked Questions
The New Mexico Land Conservancy provides the following information as a resource to assist you as you consider placing your land under a conservation easement.
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2. Why would a landowner want to consider a conservation easement?
3. What form does a conservation easement take?
4. What should a landowner consider
when setting up a conservation easement?
5. How is a conservation easement valued?
6. Is public access required?
7. Does a conservation easement prohibit
all uses and development of the property?
8. Can a conservation easement be completed after the death of a landowner?
9. What is a land trust?
10. What is the role of a land trust?
11. What are the tax benefits of a conservation
easement?
12. What are the income tax benefits of a conservation
easement?
13. What are the Estate tax benefits of a conservation easement?
14. Are conservation easements the only method available to reduce inheritance taxes?
15. How can a conservation easement benefit public entities?
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Answers To Our Frequently Asked Questions -
1. What is a conservation easement?
A conservation easement is a legal agreement that contains
permanent restrictions on the development or use of a piece of land
for the purpose of protecting the agricultural, scenic, open space,
wildlife habitat, recreational or historic values on that land.
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2. Why would a landowner want to consider a conservation easement?
A landowner enters into a conservation easement as a voluntary
act to preserve land. Preserving a piece of land is as much a private
property right as developing it. A landowner may use a conservation
easement to keep a piece of land in its current condition. Conservation
easements may allow additional limited development – for example,
a landowner may want to provide homesites for his children or reserve
a limited number of homesites as a source of future income. There
are also a number of federal, state and estate tax benefits associated
with the donation of a conservation easement which are discussed further
below
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3. What form does a Conservation Easement take?
A conservation easement is a legal contract between a landowner,
who is generally referred to as the “grantor,” and a land
trust, which is generally referred to as the “grantee.”
Government entities may also hold conservation easements. While all
conservation easements contain some standard legal language, each
easement is tailored to the specific conservation goals of the landowner.
In many cases, the land trust may have a model easement with standard
boilerplate language that it will use as a template for drafting a
final easement for a given property. The final conservation easement
is signed by both parties and recorded in the county real estate records,
just like a deed.
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4.What should a landowner consider
when setting up a conservation easement?
All conservation easements must be written and structured to comply
with a number of requirements, particularly regulations set by the
IRS. It is important for a landowner considering a conservation easement
to consult with a land trust as well as their legal and tax advisors.
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5. How is a conservation easement valued?
An independent appraiser establishes the value of a conservation
easement by using what is known as the “before and after approach”
by which the appraiser determines the value of the property before
the conservation easement is placed on the property and the value
of the property after the property is encumbered by the conservation
easement. The difference between the “before” and “after”
values is the value of the easement.
For example, the fair market value of a 1,000 acre ranch or farm
in a rapidly developing area might be $2,000/acre. Some of that value
reflects the value of the development rights (in other words, the
potential to subdivide the property for residential or commercial
development). After a conservation easement is placed on the property
allowing only two additional homesites to be built on the 1,000 acres,
the property may be worth only $1,250/acre for its use as a ranch
and for the potential to develop two additional homes. The value of
the conservation easement is the difference between the $2 million
property value before the conservation easement and the $1.25 million
after the conservation easement. In this case, the conservation easement
would be worth $750,000.
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6. Is public access required?
Public access is generally not required when a conservation
easement is granted to a private land trust. However, if one of the
purposes of the conservation easement is to permit public (recreational)
use, the land trust or government entity acquiring the easement may
require public access. In these cases, the specific locations and
levels of public access and use are negotiated with the landowner.
For example, the landowner and land trust may agree that public access
for certain kinds and levels of recreational use are to be permitted
along a specifically defined trail route, but nowhere else on the
property.
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7 Does a conservation
easement prohibit all uses and development of the property?
No. Conservation easements often permit farming,
livestock production and timber harvesting, although they typically
do not permit other forms of commercial or industrial uses. Furthermore,
conservation easements do not necessarily prohibit additional agricultural
and residential development. A landowner may reserve limited development
rights for future agricultural structures/improvements, personal homesites
or development lots for sale. The number of development rights which
could be reserved by the landowner will depend on various factors
particular to each easement, including the size of the property, the
conservation values to be protected and the proposed location of the
reserved development rights in relation to the conservation values.
While the IRS regulations do not create a precise measure of the number
of development rights which can be reserved, sufficient conservation
values must be protected and there are other requirements with which
the easement may have to comply in order to qualify for a charitable
deduction under the regulations.
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8. Can a conservation easement be completed after the death of a landowner? Yes. The Internal Revenue Code provides that for certain
properties which qualify, the estate may donate a conservation easement
after the death of a landowner and obtain an estate tax deduction
for the value of the easement. However, it is much better planning
for a landowner who wishes the property to be encumbered by a conservation
easement after their death, to provide for this in their will.
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9. What is a land trust?
A land trust is a private, non-profit organization that uses
conservation easements and other voluntary land conservation techniques
to protect and preserve land. In most cases, the members of the board
of directors of a land trust are typically members of the community,
region or state in which the land trust operates.
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10. What is the role of a land trust?
The terms of the conservation easement are negotiated between
the land trust and the landowner. Once the conservation easement has
been granted to the land trust, the land trust has the responsibility
for periodically inspecting the property to verify that it is in compliance
with the terms of the conservation easement. The land trust is responsible
for enforcing the development restrictions and other restrictions
defined in the conservation easement.
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11. What are the tax benefits
of a conservation easement? If the conservation easement meets the public benefit test
described above (by fulfilling one or more of the conservation purposes
recognized by the IRS), the donation or sale at less than fair market
value of a conservation easement to a qualified conservation organization
(either a land trust or a governmental entity) may be treated as a
charitable contribution of the development rights associated with
the underlying property. The donation of part or all of the conservation
easement’s value may qualify the landowner for a tax deduction
on his federal income tax return. In New Mexico, the donation of a
conservation easement may also qualify the landowner for a tax credit
against his or her New Mexico state income tax liability. The current
amount of the state tax credit is 50% of the value of the conservation
easement donation up to a maximum of $250,000 per taxpayer on the
property deed. In addition, a conservation easement can lower the
property value for estate tax purposes and may qualify the encumbered
land for an additional partial exclusion from estate tax. In the case
of purchased conservation easements, the proceeds from the sale of
a conservation easement are treated as taxable sale of real estate.
However, if the landowner sells a conservation easement for less than
its appraised fair market value (bargain sale), the difference may
be treated as a charitable contribution.
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12. What are the income tax
benefits of a conservation easement?
Using the example above, if the conservation easement
was entirely donated, the $750,000 value of the conservation easement
will be a charitable deduction that can be used to offset the landowner’s
federal income taxes. This type of charitable deduction may be used
to offset only 30% of the landowner’s adjusted gross income
in the year the gift is made. However, the deduction can be used as
needed over the following five years, offsetting up to 30% of adjusted
gross income each year. The charitable deduction may be used to offset
either ordinary income or capital gains.
In New Mexico, a landowner who is a New Mexico state taxpayer may
also be eligible for a state tax credit equal to half the appraised
value of an easement donation up to a maximum of $250,000 per taxpayer
on the property deed. Any portion of the tax credit which is not used
in the year of the gift may be carried forward and used to offset
a landowner’s New Mexico state income taxes for up to 20 consecutive
years until it is fully expended. Alternatively, the tax credit can
be transferred or sold at a discounted rate to a buyer who can then
use the tax credit to offset his or her state tax liability.
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13. What are the estate tax benefits of a conservation easement?
Despite recent changes in the estate tax rates and allowable
exemptions, estate tax rates remain the highest rates faced by the
American taxpayer. Using the example above, the easement encumbered
property will be valued at $1.25 million for estate tax purposes rather
than $2 million. In this example, the reduction in the value of the
property by $750,000 resulting from the placement of the conservation
easement could save the heirs a considerable amount of estate tax
that they would otherwise have had to pay after the death of the landowner,
based on the value of the unencumbered property and depending on the
size of the estate. Most importantly, this could mean the difference
between the heirs having to sell the property to pay the estate taxes
or keeping the property in the family.
In addition, if the easement qualifies under certain provisions of
the IRS Code, then 40% of the value of the property remaining after
the granting of an easement can be excluded from the value of the
estate, up to a maximum exclusion of $500,000. In our example, the
remaining value of the property after the granting of an easement
is $1.25 million and forty percent of that is $500,000. If this easement
qualifies, then an additional exclusion from the estate of $500,000
could be available.
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14. Are conservation easements the only method available to reduce inheritance taxes?
No. A special valuation is another important tool available
to persons inheriting land used in a family farming or ranching business.
To qualify for a special use valuation, generally the farming or ranching
property must make up at least 50% of the value of the estate and
certain heirs must agree to continue the agricultural activity for
10 years, or pay an additional tax. If the estate qualifies for a
special use valuation, the land will be valued at its agricultural
value, not its fair market value. The reduction in value is limited
to $750,000. It is possible to donate a conservation easement without
violating restrictions in the special use valuation rules against
a sale or other disposition of the property for a 10 year period.
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15. How can a conservation easement benefit public entities?
Several possible benefits can accrue to a public entity through
the use of a conservation easement. A donation of a conservation easement
for the tax benefits available to the donor can also advance a public
entity’s open space goals, such as the protection of wildlife
habitat or scenic views. Where a landowner is not interested in making
a donation of a conservation easement, the purchase of an easement
can advance public open space goals at a lesser cost than by a purchase
of fee title, while keeping the property on the tax rolls and not
requiring ongoing public maintenance. In conjunction with development
proposals, while a required conservation easement will not qualify
as a donation, the protection of the open space portion of a project
will advance open space goals and can mitigate the impact of such
development, while providing comfort to a community about the long-term
protection of the open space.
If you have additional questions, please contact us.
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