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IS A CONSERVATION EASEMENT
|A number of ranchers are doing a lot of talking these days about
conservation easements. Some will tell you that conservation easements
saved their family ranches from the twin evils of urban sprawl
and the tax collector. Others will argue, with equal force, that
conservation easements are wolves in sheeps clothing that will
steal your property rights for the government or environmentalists.
In this article, I hope to avoid the vitriolic extremes by describing
the general nature of conservation easements and encouraging those
who want to know more to do their own investigation.
Conservation easements came to the forefront of tax planning for ranchers with the enactment of the Taxpayer Relief Act of 1997. One part of this law provides a partial exclusion from estate taxes for lands in the estate subject to a qualified conservation easement. A conservation easement limits the type and intensity of future land use while allowing the landowner to retain the remaining ownership and control of the property.
In essence, the development rights on the property are transferred to the easement holder either by sale or through donation. The easement may affect the entire property or only a portion, and it runs with the land. That is, it is permanent and binds all future owners of the land. The easement must be recorded at the county clerk or recorders office just like a warranty deed.
In order to obtain estate tax relief, the recipient of the easement must be a qualified non-profit organization or public agency qualified to hold conservation easements such as a state fish and game agency. The easement itself must also qualify under the Internal Revenue Code. For example, the easement must accomplish one of the following four goals: (1) The easement must preserve land for outdoor recreation or education of the general public; (2) It must protect habitat; (3) It must preserve open space for scenic enjoyment of the public or pursuant to a governmental conservation policy; or (4) It must preserve an historically important area or structure.
As with every other tax law known to man, the definitions and detail are very complicated. The
question arises: Why bother? The reason is that a qualified conservation easement will reduce the value of your ranch thereby lowering your estate taxes while at the same time allowing you to use the land for ranching. For many ranch families, estate taxes mean the loss of the ranch when land-rich, cash-poor survivors must sell the ranch to pay the estate tax.
An easement must be drafted with slavish attention to the Internal Revenue Code. A number of provisions must be included such as legal description of the property, careful description of the restrictions, monitoring and enforcement provisions, and the like.
A conservation easement can also reduce your income tax liability. This, however, may be a false promise based on a false premise; namely, that you actually have income against which you can take an income tax deduction. As a rule of thumb, you must have income three times greater than your tax benefit to take full advantage of that benefit.
Consider the sale of a trophy ranch in a highly scenic area in any western state. Assume that the fair market value of the ranch without an easement is $20 million, and $10 million with an easement. (This assumption may be faulty. The market for ranches with easements may develop to a point where an easement enhances the value of the ranch, as scenic values surpass development potential.) Assuming a 45 percent tax rate, your $10 million charitable contribution converts to an income tax benefit of $4.5 million. The amount of income needed to utilize the deduction is over $33 million. If your income exceeds $30 million, you are not ranching for a living. Remember the three-to-one ratio of income to tax benefit and do your own math.
If you plan on buying a ranch, conservation easements can lower the purchase price. Assume that you decide to buy a ranch for $1.5 million. If you pay cash, the after-tax cost remains $1.5 million. If you contribute a conservation easement at the time of purchase worth half the value of the ranch, then your tax savings for that charitable contribution (assuming a 45 percent ordinary income tax rate) is $337,500, reducing your after-tax cost to $1,162,500. If you pay $750,000 cash plus $750,000 in appreciated marketable securities to purchase the ranch, and then contribute an easement on top of that, the combination of the charitable contribution and the capital gains avoidance results in a tax savings of over a half million dollars, or an after-tax purchase price of $975,000a 35 percent reduction in the original purchase price.
Make no mistake. The easement will restrict your opportunities and the opportunities of all future owners to develop your property. Your decision whether to place an easement on all or a part of your ranch must be a deft blend of all the considerations that you normally take into account when dealing with your ranch propertyincome and estate tax consequences, present and future financial obligations, family matters, and management flexibility. At the end of the day, your signature on any conservation easement is voluntary, recognizing that there are external pressuressuch as tax liabilitythat can make even the most voluntary decision seem coerced. This decision process will be different for every rancher, just as every ranch is different.
Keep conservation easements in perspective. They are one tool among many to control income and estate taxes. Other, more traditional tax avoidance measures can and should be analyzed in conjunction with the impact of a conservation easement on the value of the property. Do your homework, seek legal and tax advice, and reach your own decision. The current debate over conservation easements generates more heat than light, but your investment in educating yourself will reveal where your priorities lie.
Bill Myers is an attorney in the Boise, Idaho office of Holland & Hart where he specializes in representing ranchers. Before joining Holland & Hart, he was executive director of the Public Lands Council and director of Federal Lands for the National Cattlemens Beef Association.