In our previous posts on conservation easements, we discussed how a real property owner can donate a conservation easement to their land and retain rights to the rest of their 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 for 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. A farmer who is facing an increase in property taxes may do this in order to keep their land, obtain funds from the sale of the easement, and benefit from lower property taxes as a result of a reduction in the value of the property. 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 the like-kind exchange rules of 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, the landowner exchanges a conservation easement for additional property. For example, in Private Letter Ruling 9621012, the IRS ruled that a taxpayer with a ranch could exchange a perpetual scenic conservation easement over a portion of his land for a new parcel of timberland property, and take advantage of the tax benefits of a like-kind exchange.
1031 exchanges of conservation easements 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 for like-kind exchanges
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.
Warning: Note that the government has significantly increased enforcement actions for conservation easement transactions, and coordinated audits are being conducted throughout the various examination divisions of the IRS. We advise taxpayers to be cautious of promoters assembling syndicated conservation easements, in which investors in partnerships and other pass-through entities are offered charitable contribution deductions in amounts that significantly exceed the amount invested. To learn more about the IRS crackdown on fraudulent conservation easements, see Notice 2017-10.