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Hawaii Island Land Trust
PO Box 895
Honaunau, HI 96726
(808) 328-9635
inquiry@konalandtrust.org
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 What is a
Conservation Easement?
A
Flexible Tool for Preserving Hawaii’s
Open Spaces
Preserving lands from
future development can be a satisfying act of generosity for people who are
committed to protecting the natural beauty of Hawaii’s environment. Across
the United States,
non-profit land trust organizations have been helping landowners preserve
their family lands through the use of donated or purchased conservation easements,
bargain sales, and donation of lands.
In our experience,
the conservation easement is the tool most often used because it allows
landowners to achieve their conservation goals while maintaining ownership
and a high degree of control over their property. While this document focuses
only on conservation easements, Kona Land Trust (KLT) staff are available to
discuss with you how any of these tools might also help you attain your
conservation goals.
What
is a Conservation Easement?
The conservation easement (or land restriction) is a flexible tool that
protects land while leaving it in private ownership. It is a recorded legal
document that guides future uses of a property regardless of ownership. A landowner generally donates the easement
to a qualified conservation organization like Hawaii Island Land Trust or a
government agency which in turn ensures that the conditions of the easement
are met over time.
Conservation easements provide numerous benefits, including:
- The landowner
retains title to the property and can live on it, sell it,or pass it on
to heirs, knowing that it will always be protected.
- Easements may also
provide income tax and property tax reductions by eliminating unwanted
development value.
- Easements may
eliminate or greatly reduce estate taxes, preventing the forced sale of
properties to raise cash to pay estate taxes.
- Easements can reduce
the potential for disagreement over future uses when lands are passed
on to the next generation.
- Easements offer
permanent protection, applying to all future landowners. A land trust
organization or government agency ensures that restrictions are
followed in perpetuity.
Landowners "own" many rights associated with the land, e.g., the right
to harvest timber, build structures, extract minerals or farm, subject to
zoning and other laws. By placing a conservation easement on land, some
of these rights are voluntarily relinquished. For example, a landowner
might give up the right to build additional residences while retaining the
right to grow crops or graze the land.
Conservation Easements can be individually
tailored to protect the land's natural and cultural values, meet financial
and personal needs, and attain conservation goals. The landowner,
through the easement, decides what the future use of the land will be.
It might be that the landowner retains the right to create future building
lots, but limits the number to less than would be allowed under zoning
laws. In many cases, the landowner limits the location of future
structures and the types of activities that can take place on the land.
Some easements allow for public uses (e.g., hiking or horseback riding), but
this is not required.
The flexibility of conservation easements may
prove beneficial in financial planning. A conservation easement can
either be applied to part ofa property or placed on the entire tract, while
allowing for a "building envelope," i.e. a building site within
which construction can occur.
Tax
Benefits of Donating an Easement
The donation of a conservation easement to a land trust organization may
result in income, estate, and property tax benefits. (Please note that Hawaii
Island Land Trust cannot offer tax advice. The following examples are for general
information only. Please consult with your tax advisor).
Federal Income
Tax
In order for a conservation easement to qualify for a tax deductible contribution,
it must meet three requirements of Section 170(h) of the Internal Revenue
Code:
6.
It must be a restriction on the use of
real property;
7.
It must be given in perpetuity to a
qualified organization, like Hawaii Island Land Trust; and
8.
It must be created exclusively for
"conservation purposes."
To meet the third requirement, KLT will assemble the appropriate documentation
and prepare statements aimed at qualifying the easement on the basis of one
of the "conservation purposes" acceptable to the IRS. These purposes include: (a)
recreation or education, (b) habitat protection, (c) open space protection,
and (d) historic preservation. Not every property will meet this
conservation purposes test and the final decision as to whether or not a
property qualifies lies with the IRS.
Assuming the above three requirements are met,
the value of a conservation easement is determined by a qualified appraisal
of the land "before" and "after" the easement is in
place. If the land value is reduced by the easement, the amount of the
diminution in value (which is the value of the easement) is deductible as a
charitable contribution for purposes the donor's federal and, in some cases,
state income taxes. The deduction for non-cash charitable contributions
is limited to 30% of the donor's adjusted gross income ("AGI") in
the year of the donation. If the easement value exceeds the 30% limit,
however, the donor may carry over the unused deduction amount for up to five
years.
As an example, assume that owners of a property
worth $500,000 place a conservation easement meeting the requirements of IRC
section 17(h) on their land that precludes all future development. A
qualified appraiser then determines that the land's fair market value,
without the potential for development, is $200,000. In this case, the
charitable gift would be valued at $300,000. If the donor had an annual
AGI of $300,000, the donor can take a charitable deduction of $100,000 in the
year of the donation, and deduct $100,000 annually for the next two
years.
While most conservation easements reduce property
values, there is no rule of thumb for determining what the diminution in
value will be. In general, the reduction tends to be greatest where a
highly restrictive easement is placed on prime development land in an area
experiencing intense growth. (For more examples of federal income tax
deductions for conservation easements, see Preserving Family Lands, by
Stephen J. Small).
Federal Estate
Tax
High estate taxes can prevent a family from passing land on from one generation
to the next. When landowners die and leave land to their children, the heirs
often find that the property has appreciated dramatically, making them
land-rich but cash poor.
Current estate tax laws are in a state of
flux. In brief, underthe old estate and gift tax rules, an individual
could give to others during lifetime or leave to others by will up to
$675,000 without any tax. Under the new law, the amount that can be left
to others at death increased to $1,000,000 in 2002 and is scheduled to
increase as follows:
- to $1,500,000 in 2004
- to $2,000,000 in 2006
- to $3,500,000 in 2009
In 2010, the estate tax is repealed for just one
year. In 2011,however, the cap returns to $1,000,000. It is
likely that Congress will revisit the estate tax laws and revise them yet
again in the years to come.
Section 2031(c) of the Internal Revenue Code
allows for an exclusion from estate taxation of up to forty percent (40%) of
the value of land subject to a qualified conservation easement, up to a
maximum of $500,000. This is in addition to the reduction in property
value that results from the conservation easement itself. The effect of
the exclusion is to eliminate value from an estate that would otherwise be
subject to estate taxation. The actual tax savings therefore depends on
the tax bracket of the estate (in 2002 a maximum rate of 50%; the rate is
scheduled todrop over the next few years).
In the following example, a couple bought 100
acres of rural land for$3,000 in the 1950s. The land is now surrounded
by suburban subdivisions. When they die, the couple leaves the land to
their children, intendingto have the property remain in the family forever.
However, the property, now worth $3,000,000, is the major asset in their
$3,500,000 estate. Since the federal estate tax obligation is well over
$1,000,000, their children have to sell at least some of the land to secure
enough cash to pay the federal estate taxes. (In most 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.,
its potential for development), not at its original purchase price, or its
current or planned use. In the example above, taxes have to be paid on
development potential that the couple never intended to use and the
inheritance available to their heirs is reduced unnecessarily.
A landowner who restricts future development with
a conservation easement can reduce the fair market value (and, consequently,
the estate taxes). This effect tends to be greatest for landowners with
sizable estates andsubstantial real estate holdings because of the existing
estate tax exemption. Due to the increasing market value of land, more
and more landowners find their holdings exceed the limit.
Property Tax
Placing land under easement might or might not result in property tax savings.
The tax assessment on an easement-restricted property should reflect the
land's reduced value. Kona Land Trust is working with Hawaii County
to ensure that property tax assessments on conservation easement-restricted
properties does in fact reflect the reduced value of the property.
The
Conservation Easement Process At Kona
Land Trust
At Kona Land Trust, the process begins with an understanding of you and your
needs. Generally, a representative of KLT will meet with you, review your
objectives, explain KLT’s conservation easement program, and walk the
property with you to determine its conservation potential. Since most
landowners need time to consider easement options, it is not unusual for them
to meet with KLT staff again before making a commitment to proceed. Once this
decision is made, our staff will review the proposed conservation easement
with our Board of Directors. Board approval is required before KLT can
accept an easement. After approval, them ajor elements of the process
are as follows:
- First, we compile
baseline data on your property, documenting its physical condition and
natural resource value. Maps, photographs, and narrative descriptions
of the existing conditions provide the basis for developing a
Conservation Plan for the property and for future monitoring of
easement compliance. The baseline data also satisfies IRS regulations requiring
documentation of the condition of the property at the time of the
charitable contribution.
- After we complete
the baseline property documentation, we will prepare a Conservation
Plan that meets your needs and the criteria of our easement program. As
we prepare the plan, we may suggest special measures to control future
disturbances or encroachments upon floodplains, wetlands, or other sensitive
environmental areas. The actual conservation easement document will
reflect the objectives that you and KLT have agreed upon, as well as
the Conservation Plan for your property.
- Lastly, when you are
prepared to execute the easement, it is signed by you as the donor and
KLT as the donee. It is then notarized and recorded. If there is an existing mortgage on
the property at the time of the easement conveyance, you must also
obtain the consent and subordination of the mortgage to the
conservation easement from the mortgagee.
Donating Conservation Easements
By Will
A conservation easement can also be granted by an individual in a will. With this option, you won't receive income
or property tax benefits, but your estate taxes can be reduced.
If you intend to donate an easement by will, ideally terms of the
easement would be negotiated during your lifetime. The collaborative planning
ensures that the easement meets your conservation goals, as well as our
long-term objectives.
Because a conservation easement gift can
take time to plan, you may want to consider adding a codicil to your will
now, stating your specific intentions for the land and instructing your
executor to complete the easement in the event of your death. Your will can
be amended later if family or financial circumstances change or if you decide
to grant the easement during your lifetime. In the interim, though, you will
have protected the land and lowered estate taxes.
Your
Attorney's Role
Tax laws are complex and subject to change. If you are considering a
conservation easement for your land, we encourage you to retain an attorney and/or
tax advisor competent to advise you on real estate and tax matters. We will work closely with your attorney to
prepare the easement.
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