Our conservation easement attorneys work closely with our transactional attorneys to ensure that our clients obtain and benefit from tax breaks and probate guidance. We help to retain the land’s natural beauty, while assisting in creation of open space programs, land banking, and land giving programs. We assist with Douglas County conservation easements, and conservation easements throughout Colorado.
The size of our firm allows us to offer cost-effective representation, providing a close working relationship between our clients and our attorneys to ensure a targeted course of action after a thorough review of all options.
Folkestad Fazekas Barrick & Patoile, P.C., is the oldest and one of the largest law firms in Douglas County, Colorado. Founded in 1972, we are committed to the Front Range Area and surrounding communities. We are known for having seasoned attorneys who are skilled in all of the numerous facets of conservation easement issues.
COLORADO CONSERVATION EASEMENTS AND TAX BENEFITS*
I. What is it?
in Colorado, a conservation easement is an agreement between a landowner and a land trust or government entity which places permanent restrictions on the use or development of land. The conservation easement is contained in a deed that is recorded in the county real estate records. A landowner may reserve one or more building sites for present or future use. A conservation easement that is donated may qualify as a charitable contribution, or sold for less than market value. The restrictions on the use or development of the land must result in a public benefit. Public access is generally not required. Land subject to a conservation easement can be sold, mortgaged, or given away.
II. What are typical restrictions in a conservation easement?
A. No subdivision or limited subdivision.
B. Limited uses of the land.
C. No commercial or industrial uses. Agricultural uses such as ranching or farming are often permitted.
D. No surface mining.
E. Water rights may or may not be restricted to use or the property.
F. Proper land, timber and range management.
III. What are the tax benefits?
A. Federal Tax Benefits. If the conservation easement is donated and satisfies Internal Revenue Code requirements, there are the following tax benefits:
1. A charitable income tax deduction for the value of the conservation easement. May be used against ordinary income as well as capital gains. Limited to tax basis in the conservation easement until the property is owned for one year, and for dealer property (i.e., non capital gain property). Limited to 50% of adjusted gross income for capital gain property and 50% of adjusted gross income for non-capital gain property. Maybe used in the year of the donation and each of the following 15 years.
2. An estate tax reduction, decreasing the value of the taxable estate by the value of the conservation easement. In limited circumstances, a partial exclusion from estate taxes for the residual value of the land subject to the conservation easement. Lowers value of property in the taxable estate to “after” value. If the conservation easement qualifies under Internal Revenue Code §2031(c), a portion of the value of the land subject to the conservation easement will be excluded from the taxable estate. Under Internal Revenue Code §2031(c), the taxpayer’s estate may exclude up to 40% of the residual value of the land (up to $500,000.00) from the taxable estate if:
i. The conservation easement was granted by a family member.
ii. The conservation easement prohibits more than “a de minimis use for a commercial recreational activity.”
3. Order of the tax benefits for corporations:
a) For a C corporation, the charitable deduction is limited to 10% of the corporation’s contribution base (adjusted taxable income).
b) For a S corporation, the deduction passes through to shareholders but is limited to basis in stock.
c) For partnerships and limited liability companies, the deduction passes through to partners and members without any basis limitation.
B. Colorado Tax Benefits.
1. State Income Tax Credit
a) A Colorado income tax credit for a donated conservation easement of up to $375,000 (subject to the limits discussed below) with a 20 year carry forward. The income tax credit may be transferred or refunded in cash in years in which the state has a budge surplus (up to $50,000 of credit and refund per year).
b) The income tax credit is limited to 50% of the value of the conservation easement up to a maximum of $375,000. For example, a qualifying donation of a conservation easement with a value of $750,000 will result in a Colorado tax credit equal to $375,000; a conservation easement with a value of $500,000 will result in a credit of $250,000.
c) The Colorado income tax credit can be transferred by the donor of the conservation easement, by gift or sale to another party, who can then use the credit. The entire credit of the donor must be used before the donor may claim a new credit for an additional conservation easement donation. For example, assume a landowner donates a conservation easement in 2007, which is eligible for the entire $375,000 Colorado income tax credit. The transferor sells the credit to a transferee who uses $100,000 of the credit in 2007 and $275,000 of the credit in 2008. The transferor must wait until 2009 before donating any additional conservation easements or the donation will not qualify for a Colorado income tax credit.
d) A charitable income tax deduction for the value of the conservation easement in excess of $750,000.
2. Local Property Taxes.
a) Land having a property tax classification of agricultural at the time that a conservation easement is placed on the land will continue to be classified as agricultural provided that the conservation easement permits ranching and/or farming. This is true even if the land ceases to be used for farming or ranching purposes after the easement is placed on the property.
b) For property tax purposes, the restrictions contained in a conservation easement will lower the value of the land. The decrease in value will correspond to the severity of the restrictions contained within the conservation easement. Land that is subject to an easement which significantly limits use of the property will be valued or result in a significantly lower value because of such limitations.
IV. What are the requirements to qualify for tax benefits?
A. Under Internal Revenue Code § 170(h), the conservation easement must provide a public benefit and be granted exclusively for conservation purposes. Conservation purposes include the following:
1. Preservation of land for public outdoor recreation or education.
2. Protection of the natural habitat of wildlife or plants.
3. Preservation of open space, including farmland and forestland, for the scenic enjoyment of the general public or pursuant to a clearly delineated governmental conservation policy, that will yield a significant public benefit.
4. Preservation of historically important land or a certified historic structure.
B. The conservation easement must be granted to a qualified organization (IRC §170 (h)(3)). (Land trust or governmental entity).
C. All mortgage lenders must subordinate the lien of the deeds of trust to the easement interest.
D. No surface mining.
1. If the landowner does not own the minerals, no charitable deductions may be obtained, if there may be a removal of minerals by any surface mining method, at any time in the future.
2. However, a landowner that does not own the mineral rights, may obtain a charitable deduction if the probability of removal of the minerals by any surface mining method is so remote as to be negligible. This requires an opinion from a qualified professional (mining engineer, geologist, etc).
E. The condition of the property at the time of the donation requires written documentation. This requirement is satisfied by the preparation of a baseline inventory.
F. The conservation easement must be perpetual.
G. The deed of conservation easement must be recorded in the county records.
H. A cash donation to the easement holder to serve as an endowment for monitoring and enforcement of the conservation easement is often made by the landowner. However, if the cash payment is required by the holder in exchange for accepting the easement, not only will the cash donation not qualify as a charitable contribution, but the donation of the easement may itself not qualify as a charitable contribution.
I. The conservation easement must be donated or sold for less than its market value. A conservation easement that is granted in return for something, i.e., where there is a “quid pro quo,” does not satisfy the “donative intent” requirement and does not qualify for a charitable deduction. An example is a conservation easement granted by a landowner in exchange for annexation or zoning of the property, or to obtain a building density bonus.
J. The taxpayer’s tax basis in the land is reduced by the proportion that the value of the conservation easement bears to the value of the land, which will result in a higher capital gain when the land is sold.
V. How is a conservation easement valued?
A. An appraisal of the property is prepared by a qualified appraiser. If there is a record of sales of comparable conservation easements to governments or land trusts, the appraisal must be based on those comparable sales. If not, and this is more common, the appraiser will value the land before the conservation easement is placed on the land and after the land is subject to the conservation easement. The value of the conservation easement is the difference between the “before” and the “after” values of the land, and any other adjacent or nearby properties owned by the landowner or his family.
B. If the conservation easement does not include all of the land owned by the donor, all of the donor’s land must be appraised, and any increase in the value of the land not subject to the conservation easement is offset against the value of the conservation easement.
VI. What are other federal tax issues?
A. Deal issues. Different tax rules apply to the grantors of conservation easements who are “dealers” under the Internal Revenue Code rules. A real estate developer may often be a dealer. A dealer is limited to a tax deduction equal to its “basis” (or cost) of the donated property.
B. A conservation easement can be made by a will. A gift made by will is considered effective as of the date of death and will reduce the estate taxes of the decedent.
C. A conservation easement can be conveyed after death by the decedent’s estate and qualify for an estate tax deduction if the property meets the requirements of Internal Revenue Code §2031(c) and if authorized under state law. Under Colorado law a fiduciary may grant a conservation easement, subject to notice and consent requirements. See C.R.S. § 15-1-804(2)(hh).
D. Conservation easements are interests in real property that can be used in tax deferred like kind exchanges.
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