Hunterdon Land Trust Alliance
A nonprofit conservation organization working to preserve and protect the rural character of Hunterdon County, New Jersey.
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Protecting land from development can be a rewarding act for people who
are dedicated to preserving the natural splendor of our environment and
rural character of our county. Hunterdon Land Trust Alliance works with
willing landowners to preserve their land through donations, outright
purchase, deed restrictions, bargain sales, limited development, and conservation
easements. Many landowners feel attachments to their land yet are unaware
of methods to preserve it. HLTA works to educate land owners as to preservation
options and facilitates preservation projects.
Q.& A. ABOUT CONSERVATION EASEMENTS:
What is a conservation
easement?
What factors determine the
value of conservation easements?
How does one compute the value
of an easement?
Is an easement forever?
What does this do to the value
of the land?
Can it ever be sold?
Who enforces an easement?
What about privacy and public
access?
Stewardship Fund Contribution
What are the tax benefits of
preservation?
Donating an easement by Will,
Remainder Trust, Gift Annuity
The Role of your attorney
The easement process at
Hunterdon Land Trust Alliance
What is a conservation easement?
An easement is a legal agreement between a property owner and some other entity, e.g., a foundation, organization, local government, or some other group dedicated to maintaining that agreement. A conservation easement is a permanent deed restriction intended to prevent future development of the property. It legally binds all present and future owners of the property and is recorded in the Register of Deeds.
What factors determine the value of conservation easements?
In the discussion of land or property it is important to understand that the owner owns not only the land itself, but also a bundle of rights that are associated with the property. These are property rights. The owner, for example, may have the right to farm the property-to grow anything his heart desires. He may have the right to cut trees, race horses, raise chinchillas, practice bulldozing, erect fences, mine for molybdenum, dig tunnels, or build houses (all dependent on local ordinances, of course). These rights all have value. The value of a conservation easement follows the real estate market in a similar fashion to the value of land. The location of a piece of property, its "developability," local zoning laws, and the exact terms of the easement all play an important part in the valuation of an easement.
How does one compute the value of an easement?
Independent real estate appraisers, through experience with similar properties, determine the fair market value of the land in its present condition, i.e., with no restrictions. This figure would most likely take into account the potential for the maximum number of subdivided lots and improvements (houses). A second figure is then calculated which considers the property as a whole, i.e., without the ability to subdivide or build. This second figure is then subtracted from the first figure to come up with the dollar value of the easement.
Is an easement forever?
Yes. To qualify for the favorable tax incentives granted by the IRS, easements must be "in perpetuity." An easement is a permanent legal restriction placed on the deed of the property.
What does this do to the value of the land?
The land's value is reduced-since it can no longer be developed. This is not to say that it will not appreciate as the general overall real estate market appreciates. Land is a limited commodity. As time marches on and open land becomes scarcer, a strong argument can be made for a consequent increase in value, despite restrictions on development.
Can it ever be sold?
The landowner still owns the land and can sell it, but when it is sold, it is with this permanent restriction. It can be sold many times over but the restriction remains.
Whoever holds the easement, e.g., the land trust or public agency has the legal right and the responsibility to monitor and enforce the terms of the easement. If, for example, a piece of property had been bought and sold several times after the establishment of an easement, and subsequent owners were to engage in an activity contrary to the terms of the easement, the land trust is obligated to rectify the violation. A land trust may also need to defend the terms of an easement in court at some future date. To ensure compliance with the easement, the land trust monitors the condition of the property. This is accomplished through yearly monitoring visits to the property and by maintaining a relationship with the land owner.
What about privacy and public access?
Public access is not necessarily a required element of an easement but is dependent on the goals and willingness of the land owner as well as the restrictions of the funding sources. If there is public access permitted, the property is still private property.
When HLTA receives an easement, it assumes permanent responsibility for monitoring the property and enforcing the easements. This involves an annual inspection of the property and ongoing contact with the landowners. If an easement is violated, HLTA must take action to have the violation corrected. At the time of the easement, HLTA requests a cash donation to help defray future stewardship expenses. Oftentimes the tax deduction that this charitable contribution generates for the landowner/donor is sufficient motivation to make the donation but knowing that the easement has this "defense fund" can also serve as incentive. These funds are placed in restricted stewardship endowment and used only to cover the costs of monitoring and enforcing the easement.
What are the tax benefits of preservation?
Federal Income Tax benefits.
The donation of a conservation easement to a land trust may result in tax benefits related to income, estate, and property taxes. (Note: HLTA cannot offer tax advice. These examples are broad and general information only. Landowners should always obtain tax advice from a qualified attorney or accountant.) You are, no doubt, familiar with many charities: churches and synagogues, Salvation Army, Red Cross, United Way, Boy Scouts, Girl Scouts, SPCA are all "qualified" (in the eyes of IRS) charitable organizations established for the good of the community or a sector of the community. Hunterdon Land Trust Alliance is a qualified IRS 501(c)3 charity. The donation of an easement is considered a charitable donation and as such, may be deductible on one's federal income tax forms. Assume, for example, that owners of an unrestricted property worth $600,000 place an easement on their land preventing any future development. A certified appraiser determines that the land's fair market value, without the potential for development, is $300,000. In this case, the charitable gift would be valued at $300,000 ($600,000 - $300,000 = $300,000). The landowner's tax deduction is limited by a percentage of Adjusted Gross Income. If the value of the donation exceeds this limit, the unused portion can usually be carried forward for five more years (total of six) to make the most use of the benefit.
Federal Estate Tax Benefits
Depending on the value of one's estate, estate taxes payable by one's heirs can be so high as to force the sale of a property just to meet the tax bill. Additionally, these taxes generally come due within months of death, which leaves very little time for creative solutions to preserving the family's land. For an interesting explanation and example of this problem, visit Stephen J. Small's "Preserving Family Lands" site at www.stevesmall.com. In many cases, state inheritance or estate taxes create the need for even more cash. For estate tax purposes land is valued at the current fair market value (i.e., "highest and best use," which usually means its potential for development), not at its original purchase price. By restricting future development with an easement a landowner can reduce the fair market value (and, consequently, the estate taxes). This effect tends to be greatest for landowners with sizeable estates and substantial holdings. Due to the increasing market value of land, more and more landowners find their holdings exceed the federal estate tax exemption.
Property Tax Benefits
Placing land under easement may or may not result in property tax savings. The tax assessment on an easement-restricted property should reflect the land's reduced value. However, local municipal assessment practices vary from town to town. Property tax relief for eased land is generally considered on a case-by-case basis. The best advice is to call your local tax assessor on this question.
Donating an easement by Will, Remainder Trust, Gift Annuity
A conservation easement can also be granted in a will. With this option, the landowner will not receive any income or property tax benefits because the action will not take place until after his/her death, but estate taxes can be significantly reduced. If you intend to donate an easement by will, you will need to determine the terms of the easement in advance. Since there are costs associated with monitoring easements, an agreement regarding a monetary donation to accompany the easement is required. Because an easement gift can take time to plan, sometimes landowners may want to add a codicil to their will in advance, stating their specific intentions for the land and instructing the executor to complete the easement in the event of death. The will can be amended prior to death if family or financial circumstances change or if the decision is made to grant the easement during their lifetime. In the interim, though, the land has been protected and the land and the estate taxes have been lowered. There are other creative estate-planning tools that can also be used. They are: the remainder interest, the charitable gift annuity, the charitable remainder unitrust. Every piece of land is unique and every family or personal situation is also unique. Each may require a distinctive approach to satisfy the needs and wishes of its owner.
Tax laws are complex and subject to change. If you are considering a conservation easement for your land, we encourage you to seek the advice of a competent attorney to advise you on real estate and tax matters. Decisions about property or estates are not and should not be made quickly or impulsively. They are often made as a result of natural process of planning but are sometimes forced upon people by some major life event, e.g., birth, death, divorce, illness. HLTA can work closely with your attorney when considering preservation options.
The easement process at Hunterdon Land Trust Alliance
At HLTA, the process begins with an understanding of you and your needs. A representative of the Trust will meet with you, review your objectives, explain the different programs that are available (including Green Acres and the State Farmland Preservation Program) and walk the property with you to determine its conservation potential. There are many different options available and since most landowners need time to consider easement options, it is not unusual for them to meet with the land trust staff several times before proceeding. These are not decisions that should be entered into lightly and usually there are several family members that need to be consulted to develop a mutually acceptable plan.