Conservation Easements

NOTHING IN THIS ARTICLE SHOULD BE CONSTRUED AS LEGAL ADVICE AND THE READER SHOULD NOT RELY ON THE STATEMENTS CONTAINED HEREIN.

Real Estate can be used as an instrument to minimize tax liabilities.  For example, taxpayers use §1031 Exchanges, Opportunity Zone Investments, Installment Sales, §121 Sale or Exchanges, and Conservation Easements as mechanisms to minimize tax liabilities.  This article provides a brief overview of one of the popular mechanisms used in Montana: Conservation Easements. 

Typically, a taxpayer may deduct the value of a charitable contribution that they make during a year.  Taxpayers, however, cannot deduct donations of property, if that donation is less than their entire interest in such property.  An important exception is that a taxpayer can deduct a donation of a partial interest in property if that donation constitutes a “qualified conservation easement.” 

There are many hurdles to jump to ensure that your donation of a partial interest in land qualifies you for a tax deduction as a conservation easement.  To qualify a donation as a conservation easement the taxpayer must show that they are (1) donating a qualified real property interest (“QRPI”), (2) to a qualified organization, (3) exclusively for a conservation purpose.   Each of these criteria have multiple facets to them. 

A QRPI, for example, can be a restriction, granted in perpetuity, on the use of a particular piece of real property.  These restrictions must be legally enforceable and memorialized in a Deed of Conservation Easement.  That Deed of Conservation Easement must then be recorded in the proper county. 

A qualified organization is typically a land trust, or government entity.  In Montana, The Montana Association of Land Trusts are comprised of 12 such individual non-profit land trusts.  It is possible for the taxpayer to reserve certain rights in the land when conveying to the Land Trust, but the taxpayer must provide the easement-recipient, what is generally called, a Baseline Report. 

There are many conservation purposes, but some of the more popular ones in Montana are to preserve land for outdoor recreation by the general public; to preserve a natural habitat of fish, wildlife, or plants or similar ecosystem; or to preserve open space (including farmland) for scenic enjoyment of the general public. 

The tax deduction permitted is the value of the easement donated.  What this means is that the taxpayer must obtain an appraisal.  Usually, however, there are no comparable easement sales for the appraiser to use. The appraiser will usually, therefore, determine the highest and best use of the land before donation (which then becomes the before value), and then determines the fair market value of the land after donation considering the restrictions that are now imposed on it (which becomes the after value).  The difference in the before value and after value is typically the value of the easement. 

There are numerous caveats, nuances and complications to this simplified overview of Conservation Easements, which for purposes of this Article, are impossible to cover.  It’s important to keep in mind that the Internal Revenue Service will do everything in its power to contest the validity of the deduction.  So, it is imperative to retain a tax professional and lawyer prior to proceeding with a donation of a Conservation Easement.