Law makes conservation easements attractive

By LORNA THACKERAY Of The Billings Gazette Staff
Published on Sunday, October 18, 2006

New federal legislation that increases tax incentives for conservation easements has the potential to preserve tens of thousands of acres of Montana's landscape from development.

"It's huge," said Billings attorney David Dietrich, a director of the Montana Land Reliance, the largest land trust in Montana.

"We've been advising people this legislation is just around the corner for the last five years. A lot of people were waiting for this to happen before making a decision," he said.

Now they have about 12 months to take advantage of provisions in the law that could allow them to donate easements and qualify for the generous tax advantages that expire in October 2007. Dietrich said he hopes Congress will agree to extend the law beyond that "sunset" date.

"We've received quite a few phone calls from people who have been thinking about it (conservation easements)," said Jamie Williams, state director of the Nature Conservancy of Montana. "They've heard about the legislation, and they want to do it this year."

Conservation easements have been around in Montana for more than 30 years, since Montana legislators approved the Open Space Land and Voluntary Conservation Easement Act in 1975. Easements have been most popular in the western part of the state, where land values have climbed so high that farmers and ranchers worry about passing their estates to future generations without having to sell the home place for taxes.

Land values are climbing in Eastern Montana, too, albeit more slowly, and interest in conservation easements is expanding eastward onto the plains.

Conservation easements are voluntary agreements by landowners to perpetually preserve existing landscapes in agricultural use. Easements vary, but in general they prohibit surface mining, subdivision for residential or commercial purposes and dumping of toxic wastes.

The easement follows the land title and binds future generations of owners to its terms. Under Montana law, easements can be granted to governmental entities or to qualified private organizations that are responsible for monitoring properties for compliance.

As of last February, 1.3 million acres of Montana's 93 million acres carry conservation easements. Easements on more than 870,000 of those acres are held by private, nonprofit trusts such as the Montana Land Reliance. Montana Fish, Wildlife and Parks holds easements on 257,000 acres and the U.S. Fish and Wildlife Service has easements on 143,000 acres.

Conservation easements usually reduce the market value of the land, and federal law allows the landowner to deduct the loss as a charitable contribution. New provisions signed into law Aug. 17 as part of the Pension Protection Act of 2006 increase the amount landowners can deduct.

The new provisions are especially beneficial to qualified farmers and ranchers who can show that at least 51 percent of their income is derived from agriculture. Dietrich said they could end up, over a period of years, deducting the entire value of the easement.

Under the old law, the maximum federal income-tax deduction a qualified farmer or rancher could take for an easement donation was 30 percent of his adjusted gross income a year for up to six years. The new law permits working farmers and ranchers to offset up to 100 percent of income a year and spread the deduction over as many as 16 years.

Dietrich likes to illustrate the change with the example of a $1 million property. The owner decided to donate a conservation easement. An appraiser says the easement, which will make the property harder to sell, reduces the value by $250,000.

If the owner has an adjusted gross income of $30,000, under the old law he could have claimed a 30 percent deduction for six years. Assuming his gross adjusted income stayed the same during that period, he could claim a deduction of $9,000 a year for a total tax savings of $54,000.

The new law would allow the owner to offset his entire $30,000 income for up to eight years and have $10,000 left over in the ninth year to equal the $250,000 value of the charitable contribution. Or, the owner could spread the $250,000 deduction over 16 years.

Incentives for other landowners also increased under the new law, but not as much. These would include individual landowners who are not agricultural producers, and individuals acting as corporations. Many family farms and ranches in Montana are operated as corporations and they fall into this group.

Using the $1 million property as an example, a corporation with an annual gross adjusted income of $30,000 would increase its total deduction from $15,000 spread over six years to $240,000 over 16 years.

"What's the downside?" Dietrich said. "If it would be appropriate, why wouldn't taxpayers run to the bank with this?"

He said it would be reasonable to anticipate that an additional 100,000 acres could be included in conservation easements before the law is set to expire next year. An extension of the law could keep easements rolling.

The Montana Land Reliance and the Nature Conservancy both say they are bracing for increased interest in conservation easements.

"We are going to have to be selective. I think we're going to have some serious pressure on our staff," Dietrich said.

But both organizations say they are capable of dealing with more easements and are prepared to do the required yearly monitoring.

The IRS has expressed concern that land trusts and landowners have been misusing easements to evade taxes, although no problems have been found in Montana. The IRS demands that easements considered for charitable deductions meet certain criteria. First among them is that the easement protect a valuable resource.

It must serve at least one of three conservation goals - preserving natural habitat for fish, wildlife and plants, preserving open space or preserving areas for the education or outdoor recreation of the public.