By John E. “Josh” Hall, III MAI and Laura Hulberg

Across the United States, over 61 million acres of land have been preserved through conservation easements (Land Trust Alliance, 2020). This staggering number reflects the deep commitment to stewardship held by many landowners. By placing a conservation easement on their land, property owners can ensure its natural beauty and ecological value are protected for generations to come. Conservation easements offer a unique opportunity for landowners to achieve their conservation goals while receiving valuable tax benefits from the government.

A conservation easement is a voluntary agreement that permanently limits the uses of the land to protect its conservation value. Donated easements occur when landowners donate the rights to a government agency or another approved local entity. The landowner continues to control the land, but usually cannot develop it.

The donation is calculated based on the difference of what the land would have been worth at its highest and best use if it could have been developed and the value after the conservation easement has been placed on the property, thereby limiting its development potential. The easement restrictions placed in the deed on the land often include no developments or buildings, no billboards, no mining or clearcutting of timber, and no dumping, to name a few.

Properties with significant natural features, agricultural land, or historical value are most likely to benefit from a conservation easement. In this article, we discuss how conservation easements work, benefits, risks, and important appraisal considerations.

Conservation Easement Benefits

Conservation easements have become increasingly popular in recent years, especially as a tax savings strategy. They have several benefits that can meet both monetary and personal goals.

• Protecting the Land: Through these restrictions, landowners bar development and other specific activity such as mining or logging from occurring on their property in perpetuity. Conservation easements run with the land and apply not just to the current owner, but all future owners.
• Tax Benefits: The tax liability deduction from a conservation easement comes in the form of deductions on your federal income tax, not your property tax bill. Donors deduct a portion of the appraised value of the easement from their federal taxable income. Deductions are usually limited to 50% of your adjusted gross income annually. If the value exceeds the deduction limit for a single year, there is usually a fifteen-year carryover provision. Conservation easements are also used within the scope of estate planning, reducing estate taxes owed by families in the event of death or gifting.
• Customization: There are a variety of ways property owners can customize conservation easements to align with their wishes for the land beyond the span of their own lives. Most conservation easements specify type and intensity of activities allowed on the land, such as limitations on development or restrictions on specific uses such as logging, mining, or farming. Estate and succession planning should also be considered if the land will be passed down to heirs in the future.
• Privacy: Conservation easements do not equate to automatic public access. The agreement can restrict public use to varying degrees, such as no public access, limited access, or scientific research access only. They can also be an effective strategy for creating development buffers between the land and future neighboring developments.

Careful Considerations for Landowners

Conservation easements also have some risks and costs associated with their setup. Be prepared to navigate these factors associated with the process.

• Time and Money: Conservation easements can be expensive to set up, and the landowner will need to hire an attorney, appraiser, accountant, engineers, and other professionals to help with the process. The setup process can vary, but typically takes about one to two years to complete. Ample time is needed to complete negotiations, appraisals, legal documentation, and final governmental approval.
• Risk of Overvaluation: Whether by ill intent or inexperience, an appraiser who fails to perform the thorough analysis required for a conservation easement appraisal puts the owner at risk of a challenge from the IRS, resulting in having to defend it in Tax Court. This can be expensive and result in the easement being overturned or a reduced deduction.

Valuation of Conservation Easements

Valuations of properties preparing for conservation easement must follow a specific format. All appraisals must comply with the Uniform Standards of Professional Appraisal Practice (USPAP), and various government and land trust agencies may require additional reporting specifications.

Conservation easement appraisals follow what is known as a “Before and After” valuation. This method involves determining the fair market value of the unencumbered property without easement restrictions, and then appraising its value after the easement is granted and restrictions are in place. Thorough and well-supported highest and best-use analyses for both the Before and After condition of the property are essential for reliable appraisals for conservation easements. The highest and best use of the property in the Before condition must have adequate demand in its geographical market.

This difference in value between the Before and After condition represents the value of the development rights surrendered by the landowner, ultimately determining the appropriate tax benefits for their contribution to land conservation.

The importance of having a reputable valuation firm complete the appraisal cannot be understated. Inexperienced appraisers have overvalued properties slated for conservation easements by ignoring the lack of demand for stated highest and best use in the Before condition. Examples of this mistake are mineral rights given up on a property containing minerals, but in an area where there is no demand driving market value. Other instances of overvaluation our team has seen include properties where residential subdivisions, multifamily, or senior housing are set forth as the property’s highest and best use in areas where, again, there is no demand.

In recent years there has been some abuse regarding the Before value; this has attracted the attention of the IRS. In 2022, there were 425 active cases in the Tax Court, and in 2023 there were over 700 active cases in the Tax Court.

While some promote conservation easements primarily for tax advantages, we believe these easements are most successful when rooted in genuine land stewardship, supported by reliable appraisal and well-crafted legal language.

Valbridge: Your Trusted Partner for Conservation Easement Appraisals

Landowners who are considering a conservation easement should consult with their attorney, accountant, appraiser, and other advisors to determine if it is the right choice for them. Valbridge Property Advisors specializes in the appraisal of conservation easements, having valued hundreds of properties undergoing donation. Our work is thorough, accurate, and reliable. We are experienced and trusted professionals who work with our clients and their legal counsel to help them reach their real estate investment goals. Contact Valbridge Property Advisors to discuss your conservation easement appraisal.

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DISCLAIMER: The information contained in this article is for general informational purposes only and does not constitute legal or tax advice.  Conservation easements are complex legal matters, and the specific details and implications will vary depending on your unique circumstances.  Before pursuing a conservation easement for your property, we strongly recommend consulting with qualified legal counsel to ensure you understand the legal and tax ramifications specific to your situation.