In our previous posts on conservation easements, we discussed how a landowner can donate a conservation easement to their land and retain ownership over the rest of their rights in the property, all while reducing their tax bill. Although conservation easements are usually donated, landowners also have the option to sell and/or exchange them for additional land as well as gain added tax benefits and extended land use.
Selling a conservation easement
A landowner may sell a conservation easement on their property to a qualified organization. This is often done by farmers facing an increase in property taxes – it enables them to keep their land, obtain funds from the sale, and benefit from lower property taxes as a result of a reduction in the value of the property. Owners of forestland and lakefront properties who wish to hold on to their property and not sell it for development purposes have also been known to take advantage of conservation easements. Since the ultimate tax treatment will depend upon whether the land is held as a capital asset or for use in a trade or business, a qualified tax professional should be consulted prior to any sale.
1031 exchanges of conservation easements
Under 26 U.S. Code § 1031, a landowner is entitled to trade property that is held for productive use or investment for another of comparable type and value. This also applies to conservation easements. Instead of donating a conservation easement, or selling it for cash, in a 1031 (“like kind”) exchange the landowner exchanges a conservation easement for additional property. For example, in Private Letter Ruling 9621012, the IRS permitted a taxpayer with a ranch to exchange a perpetual scenic conservation easement over a portion of his land in exchange for a new parcel of timberland property and to take advantage of the tax benefits of a like-kind exchange.
1031 exchanges are permitted so long as the following tax rules are met:
- The conservation easement must be purchased by a qualified organization
- The new property must be of comparable value to the conservation easement
- A qualified intermediary must handle the transaction
- The exchange must be completed within the requisite time frame
Conservation easement tax attorneys
The San Francisco tax attorneys at Moskowitz, LLP have extensive experience handling both 1031 exchanges and conservation easements both within and outside the State of California. To learn more about this useful tax planning and conservation tool, contact our office for a consultation.