WHAT IS A CONSERVATION EASEMENT?

A Conservation Easement is a voluntary legal agreement between a landowner (the grantor) and a qualified easement holder (the grantee), such as a land trust or governmental agency for purposes of protecting certain conservation values.

• A landowner agrees to give up certain right(s) from their bundle of rights in a property, such as the right to develop or subdivide.The landowner retains:
• Ownership and continued use of the property; such as continued farming and ranching;
• Right, to lease or mortgage;
• Construct, repair, or maintain existing and future improvements (if agreed) such as residences or agricultural improvements.
• The terms of a conservation easement are negotiated between the grantor and the grantee.
• For state and/or federal tax benefits, the easement must be perpetual (forever).
• An easement can only be terminated by judicial proceedings in a court of competent jurisdiction and only for a total loss of all conservation values.
• A conservation easement can be a donation/gift or it can be purchased, usually through a bargain-sale transaction (less than fair market value), or it can be part gift and part sale.
• It is recorded in the county real estate records.

WHAT A CONSERVATION EASEMENT IS NOT

• It is not conveying ownership or giving up property.
• It is not a government takeover. The only government involvement is if a landowner grants a conservation easement to a governmental agency (i.e. Colorado Parks and Wildlife or a municipality).
• It is not a fast or easy process. A donation of a conservation easement usually takes 8 to 12 months and up to two years for a bargain sale transaction.
• It is not cheap. The average costs involved are between $35,000 – $125,000. The costs include an appraisal, baseline report, mineral report (if applicable), title commitments, legal fees, and project and stewardship fees. There are grants and low to no cost loans available to assist landowners with the transaction costs.

WHO GOVERNS COLORADO’S CONSERVATION EASEMENT PROGRAM?

Conservation Easements are governed by Colorado statutes. The Colorado Department of Regulatory Agencies, through the Division of Conservation, administers the conservation easement tax program. The Division of Conservation certifies easement holders, processes tax credits applications, issues tax credit certificates, tracks the transfers of tax credits, and consults with the Conservation Easement Oversight Commission.

WHAT ARE THE FINANCIAL BENEFITS OF DONATING A CONSERVATION EASEMENT?

Colorado landowners can benefit financially in two ways:

• Colorado Income Tax Credit.

Tax credits are based on 90% of the donated value of a conservation easement. The value is determined by a qualified appraisal by a qualified appraiser. The appraisal is a two-part process: the first part is the fair market value of the land as is, without a conservation easement, referred to as the “before” value. The second part is the value of the land considered with a conservation easement, referred to as the “after” value. The difference between the before and after value is the value of the conservation easement. For example:

Appraised before value: $2,000,000

Appraised after value: $1,000,000

The value of the conservation easement is $1,000,000

Value of the Colorado tax credit $ 900,000 (90% of $1,000,000)

Tax Credits may be issued up to $5 Million per donation, in increments of $1.5 Million per year. Originators of the tax credit can use, sell or carry the credit forward for 20 years, or any combination of these options. In certain TABOR surplus years, the credit originator may also be able to claim up to a $50k refund from the state.

• Federal deduction. The amount of allowable federal income tax deduction is 100% for a qualified farmer/rancher or 50% for most others. The deduction can be used for 16 years (the year of donation plus 15 years).

A qualified farmer/rancher for tax purposes is determined by the IRS. Qualification as a farmer/rancher could change from one year to the next if the income received in a certain tax year is from a source other than farming/ranching, such as proceeds from a bargain sale of an easement or proceeds from the sale of a state tax credit.

Keep in mind, the federal tax deduction is reduced by the amount of the state tax credit received or expected to be received. For example, a $1,000,000 easement donation can receive a $900,000 Colorado state tax credit (90% of the donated conservation easement value). The federal deduction is reduced by $900,000, providing a $100,000 deduction.

WHAT SHOULD A LANDOWNER CONSIDER IF INTERESTED IN DONATING A CONSERVATION EASEMENT?

• Financial Consideration- A CE reduces the overall value of the land by reducing or eliminating developmental and subdivision rights. Up-front costs are associated with the donation of a conservation easement, such as appraisals, baseline reports, mineral reports, stewardship fees, application fees, etc. Landowners should also be aware that grants are available through non-profit and state agencies to assist with transaction costs.
• Complex Process and Legalities: A CE is a legally binding document negotiated between the landowner and conservation easement holder. The process is time-consuming and can be very complex. (Anywhere from 12-24 months) It is recommended to have legal counsel when maneuvering through the process. Land Trusts have legal counsel, and so should landowners.
• Stewardship/ Monitoring: If a CE is placed on a property the landowner is required to steward the land by the terms of the CE and the Land Trust has the right to access the land, at least annually, to monitor the land for compliance with the CE. The relationship between the landowner and the easement holder is long-lasting and must be a commitment agreeable by both parties.
• Perpetual Nature: Conservation Easements for tax benefits are required to be perpetual, meaning the CE runs with the land forever. The only way for a CE to be terminated or extinguished is by judicial proceedings and is only for the total loss of the conservation purpose(s).

CAN I SELL MY LAND IF A CONSERVATION EASEMENT IS PLACED ON IT?

Yes, when a property with a Conservation Easement is sold, the easement “runs with the land”, meaning it remains in effect and binds subsequent owners of the property to the terms of the easement. The new owner will inherit the responsibility of complying with the terms and restrictions of the CE. The CE’s impact on the property’s marketability and value can vary depending on factors such as location, nature of restrictions, and buyer preference.

HOW DO I KNOW IF A CONSERVATION EASEMENT IS RIGHT FOR ME?

The decision to donate a conservation easement involves careful consideration of the personal values, goals, and circumstances of you and your family. Do you want to keep the land for future generations? Are you passionate about preserving the natural, scenic, agricultural, or historic values of your property? Are you willing to forego or limit certain developmental rights? What are your personal circumstances, such as family dynamics, the future of the property, or financial needs? What if you have no heirs, but want to keep the land as it is available for future owners? Ultimately, the decision to pursue a conservation easement is a very personal one and should reflect your personal values, long-term goals for the property, and the desire to protect its conservation values. Talk with legal and financial professionals experienced with conservation easements. Seek out other donors to ask about their experiences in granting a conservation easement.

WHERE DO I START?

Research and engage a land trust or certified easement holder to determine if your values and goals for the property align with the easement holder’s mission. The easement holder will walk you through their processes and requirements.

Next, you want to engage a qualified appraiser. There are a limited number of appraisers available for this kind of appraisal so it’s important to contact and get on their schedule as early in the process as possible.

If you will be selling a tax credit, contact Conservation Tax Credit Transfer to discuss your project and register to sell the tax credit.

Contact Jody Barbour at (303) 988-1700 or email: jody@taxtransfer.net