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conservation
options
for private landowners |
INTRODUCTION
This section is intended to provide an overview of the
most common techniques for voluntary land protection. It should not
be used as the only reference in making a decision. Landowners are
encouraged to seek guidance from a tax attorney or accountant in order
to determine the most suitable option. The Compact of Cape Cod Conservation
Trusts can identify attorneys, surveyors, appraisers, accountants,
and land planners familiar with local conservation techniques.
GIFTS of LAND
Outright Donation (Fee Simple Transfer)
Giving the land to a non-profit conservation organization
or to a government agency is the simplest way to protect land.
It is only necessary to obtain acceptance from the agency
or organization to whom the land will be donated, prior to
deeding the land. A gift insures long-term protection of the
land. The donor receives tax benefits in the form of federal
income tax deductions, potential estate tax benefits, and
relief from property taxes. The donor is relieved of management
responsibilities, and automatically absolved of liability
associated with any trail use.
About 80 percent of the properties preserved by land trusts
on Cape Cod were donated. About 30 parcels per year are donated
outright in this manner. Typically, the only cost to the land
donor is for an appraisal, which certifies the value of the
donated land for federal income tax deductions. Appraisals
are needed when the claimed value of the deduction is more
than $5,000. Land trusts usually ask donors to pay remaining
property taxes on the land before it becomes tax exempt in
the next fiscal year.
Donation by Will (Bequest)
A gift of land made through a will entitles the donor to retain
full use of the land during his or her lifetime and assures
that it will be cared for in the future. It is advisable to
discuss the gift with the agency or organization prior to
inclusion in a will, to insure a plan for the care of the
land. The donor is responsible for real estate and income
taxes for the property during his or her lifetime. But removing
the land from an estate will reduce inheritance taxes.
Combined, Cape Cod land trusts typically acquire one property
per year via bequests. These properties tend to be large and
valuable, often part of a family's estate. In 1993, the Barnstable
Land Trust acquired a large coastal woodland fringed with
salt marsh through a bequest. The donation lowered the value
of the family estate by about $1 million, enabling the family
to retain most of the remaining land, rather than selling
it for development to pay high inheritance taxes.
Donation with a Reserved Life Estate
A donation with a reserved life estate may be made to a government
agency or conservation organization. The donor retains the
use of the land during his or her lifetime, and the lifetimes
of specified family members. A reserved life estate insures
that the land is protected in perpetuity, yet allows the donor
to reside on it and maintain the land. The tax advantages
with a retained life estate are less that those with an outright
donation.
On Cape Cod, in 1993, a family donated five acres of dune
and salt marsh to the Truro Conservation Trust, while reserving
the right to use the parcel for family boating and beach bathing
during their lifetimes. The reserved right slightly lowered
the value of the land gift.
Gifts of Other Properties
Many conservation organizations and agencies will accept a
gift of property with little or no environmental value, sell
it on the open market (with restrictions, if appropriate),
and use the money for the preservation of other ecologically
significant lands. The landowner is eligible for the same
tax benefits as a gift of conservation land.
This option has been rarely used on Cape Cod. In 1988, the
Brewster Conservation Trust received a gift of title to a
time-sharing unit in a local condominium. The Trust sold the
unit for $2,000 and put the money towards the purchase of
the Windmill Meadows parcel. The donor received a tax deduction
for the value of the time-sharing unit.
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SALE of LAND
Sale at Fair Market Value
Sale at fair market value is the sale of property at the price
a knowledgeable buyer would pay for the land. Most conservation
organizations are not able to purchase land at full value
owing to the high cost of land and insufficient funds. If
the land is sold at full value and has appreciated in value
since its purchase, the seller will be liable for income tax
on the capital gain. This can affect the net profit from the
sale. There are no charitable deductions associated with a
sale at full value.
Many Cape Cod towns have purchased open space at fair market
value, owing to the intense competition for land during the
development boom. A land trust has almost never paid full
value for land. The Windmill Meadows purchase in Brewster
for $145,000, at the peak of a real estate boom of 1988, is
one exception. The seller realized no tax deductions.
Bargain or Charitable Sale
A bargain sale is part donation and part sale to
a government agency or non-profit organization. A bargain
sale may entitle the seller to an income tax deduction for
a charitable contribution and to a reduction in capital gains
tax. The value of the income tax charitable contribution for
the seller equals the difference between the fair market value
and the lower negotiated selling price for charity. The net
cash to the seller at the bargain price may approximate the
fair market sale when the tax deduction is taken into account.
Capital gains must be calculated on the sale part of the
transaction. A gain is recognized if the property is sold
for more than its basis (the basis is usually equal to the
original cost, plus improvements and minus depreciation).
For bargain sales, the basis of the property must be allocated
proportionately between the part sold and the part donated.
The income tax charitable deduction from a bargain sale could
be greater that the capital gains tax liability that results
from the sale at fair market value.
In the 1990s, the Truro Conservation Trust purchased six
acres of beachfront land for $200,000; the Orenda Wildlife
Land Trust purchased 28 acres of land in Brewster at less
than $5,000 per acre; and the Chatham Conservation Foundation
purchased 23 acres along Goose Pond for $382,000. All of these
purchases were paid for through private fundraising. In each
case, the seller received substantial tax deductions for selling
below full-value to a charity.
Installment Sale
An installment sale allows an agency or organization to purchase
property over a period of years. The use of the land and the
responsibility for payment of property taxes until the sale
is complete are negotiable terms of the agreement. The seller
benefits financially by spreading the income and the taxable
gains over several years. The amount of taxable gains depends
on whether or not the land is sold at fair market value.
The Bourne Conservation Trust has used this technique successfully
to buy many parcels. In a few cases, the sellers arranged
financing by "taking back " mortgages, enabling
the land trust to raise money and pay off the purchases over
time.
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CONSERVATION RESTRICTIONS or EASEMENTS
Conservation Restrictions
A conservation restriction, also known as a conservation easement,
is a legally binding agreement between a landowner and an
agency or organization. The landowner retains title to the
property, but extinguishes certain development rights in the
property.
Easements typically restrict dumping, mining, paving and
development of houses, while allowing traditional family uses
of the property. The restricted land can be sold, but the
restriction runs with the land to the new owner.
Tax authorities recognize the fact that the landowner has
relinquished a significant portion of the property's economic
value by extinguishing his or her right to develop the property
to the fullest extent. The Internal Revenue Service may grant
income tax deductions and estate tax reductions equal to the
value of the land forgone by donating a permanent conservation
easement. The landowner must conduct an appraisal of the extinguished
value to justify the deduction.
Lands with conservation easements are often granted local property
tax relief. Cape Cod towns typically offer a practice of property
tax reductions to landowners who place conservation easements
on their land. These reductions can be generous, ranging from
75 to 95 percent, reflecting the diminution in value caused
by extinguishing certain development rights. Some towns offer
extra tax reductions if public access, such as for trail use,
is allowed.
Conservation easements have been used effectively on Cape
Cod to protect significant parcels of land. To date, more
than 4,500 acres have been protected in this manner. Types
of land that have been protected by conservation easements
include salt marshes, barrier beaches, islands, dunes, pine
barrens, shrub swamps, meadows, pond shores, and freshwater
streams.
About a dozen properties are preserved each year on the Cape
by conservation easement. A recent example on Cape Cod found
that 5.5 acres of buildable land were worth $295,000 before
the conservation easement was donated, and $85,000 after the
restriction. The landowner was entitled to a $210,000 charitable
deduction for income taxes and estate taxes. The town reduced
the land's assessment by 85 percent as well.
Deed Restrictions
Deed restrictions guiding the future use of property may be
placed in the deed at the time the property is transferred.
Deed restrictions differ from conservation easements in that
there is not a third party that assumes responsibility for
monitoring and enforcing the restrictions placed on the land.
The seller is responsible for enforcing restrictions placed
on a parcel of land before it is sold. If the seller has placed
restrictions in the deed, and retains no land nearby, he or
she may not be able to enforce the restrictions against the
subsequent owners of the land. Under Massachusetts common
law, most deed restrictions expire after 30 years.
Deed restrictions will usually affect the market value of
the land if they significantly limit development potential.
The presence of a restriction may lower the price if the property
is sold, or lower the value of the gift if the land is donated
to a conservation agency. The IRS does not allow a claim for
a loss in value resulting from deed restrictions as a charitable
deduction. A donation of land to a conservation agency, in
which the agency inserts the deed restrictions, does allow
a claim of the full fair market value of the land as a charitable
contribution.
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OTHER TOOLS
Conditional Transfers and Reverter Clauses
A conditional transfer gives more force to a deed restriction.
The deed contains a clause which states that if the restrictions
entered in the deed are violated, title to the land will revert
automatically to the original landowner and heirs, or be transferred
to a conservation agency, depending on who would be in the
best position to protect the land and enforce the restrictions.
The owner can lose the title to his or her land if the restrictions
are not adhered to.
The lowered value of the land resulting from conditional
transfers may allow the landowner to claim the transfers as
a charitable deduction if they are donated to a qualified
organization or agency. Restrictions may reduce the value
of a gift. A landowner may choose to transfer land, prior
to placing restrictions on it to a qualified agency or organization
who will place restrictions on the land. The result is a maximum
income tax deduction and long-term protection of the land.
Options and Rights of First Refusal
A landowner may desire to sell his or her land to a conservation
organization or public agency that is not in the position
to purchase it immediately. The landowner can sell or grant
an option to the buyer that guarantees the opportunity to
purchase the land in the future. An option establishes a price
at which the buyer could purchase the land during a specified
period of time.
A right of first refusal is less specific; it simply guarantees
the conservation organization or agency the opportunity to
be notified of the landowner's intent to sell. The potential
buyer may then make an offer. If another party offers an acceptable
price for the land, the organization/agency has the opportunity
at that time to match the price offered and purchase the land.
Both techniques provide legal means for a group to purchase
land at some time in the future although the group is not
bound to do so.
Mutual Covenants
Instead of involving an agency, a mutual covenant involves
only the nearby or adjacent landowners who are interested
in protecting their land. The landowners enter into an agreement
controlling the future use of their land through restrictions
agreed upon by all participating landowners. Such agreements
are permanent and could be enforced by any of the landowners
or future landowners. Mutual covenants can reduce property
taxes and estate taxes.
Leases
Leases are an alternative to permanent transfer of
land to a conservation agency or organization. A lease allows
unrestricted and exclusive use of the land for a given number
of years. Restrictions and provisions for termination of the
lease can be incorporated. The landowner can seek indemnification
from liability if the land is for public use. It is not possible
to take a charitable deduction for the value of a lease.
Management Agreements
A management agreement is a legal contract between a landowner
and a conservation organization requiring the landowner to
manage the property in a specific way for a determined amount
of time. A management agreement is good for landowners who
have already been managing their land for conservation purposes.
Frequently, management agreements are voluntarily granted
by landowners and are designed to suit both parties.
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