Dear Tyler,
I run a large seed stock operation in North Florida and have no plans to develop. An acquaintance advised that I sell my development rights through a conservation easement. What are the tax considerations of selling a conservation easement on my property? What are the benefits that come with conserving my property?
- A Curious Landowner
A Florida conservation easement is a voluntary, legally binding, and often perpetual agreement between a landowner and a land trust, government agency, or non-government conservation organization. Through this easement transaction, the landowner relinquishes their development rights, prohibiting varying land uses and developmental plans on the property. Certain agricultural uses are still permitted with respect to the constraints of the agreement. These easements can be sold or donated.
When the landowner sells their development rights, the designated agency awards the landowner with compensation based on the property value of the asset. Additionally, while giving up development rights, the landowner retains sole ownership of their property.
Conservation Easement Tax Benefits
Aside from the compensation received, some of the advantages of Florida conservation easements on agricultural lands include the preservation of the land’s agricultural state, assurance of long-term agricultural viability, and various tax and financial-related benefits.
Income Tax Benefits
The tax treatment of a conservation easement depends on whether the easement was donated or sold to the land trust, government agency, or non-government conservation organization. The Internal Revenue Service (IRS) views conservation easement donations in the same manner as gifts of land to qualified recipients. This allows donors to deduct the present value of their conservation easement donations as charitable deductions from income. The value of a conservation easement donation is the difference between the market value of the property before the easement is granted and the market value after it is granted. However, it’s worth noting that the IRS has targeted syndicated conservation easements and is aggressively pursuing those who manipulate this program.
Selling an easement to another party is treated differently than a donation. The funds received on the sale of an easement would be compared to your tax basis in the property to determine whether there is a capital gain. The proceeds received would reduce your basis in the property. If the proceeds exceed your basis, then the sale of the easement would likely be taxable. Additionally, because this is an actual sale, the sale proceeds are eligible for a Section 1031 Exchange, meaning that a landowner could sell the development rights and use those proceeds to acquire like-kind property tax-free.
Real Property Tax Benefits
Real property taxes are based on the market value of a property. Since the market value of a property is reduced when a conservation easement is granted, real property tax savings may occur as a result. Florida House Bill 7157 F.S. 196.26 and 193.501 is a two-part law that provides tax savings for land that is used for conservation. The first part provides an exemption from property taxes for land that is used in perpetuity for conservation purposes. The second part provides for a “conservation assessment” for land that does not fall into the first category but is used for conservation purposes.
Federal Estate Tax Benefits
For estate tax purposes, the value of the property is often substantially reduced when a Florida conservation easement is granted. This may translate into less or possibly no federal estate tax liability when the property is passed from the landowner to an heir. Additionally, per Section 2031(c) of the Internal Revenue Code, an estate can exclude 40% of the value of land under easement from the gross estate. However, this limit is typically capped at $500k.
In summary, a conservation easement is a wonderful way to protect your property from development while potentially saving on estate taxes.
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