Q: I am interested in restricting future development on my land. Is there a mechanism to do this, and, if so, are there tax incentives? Are these restrictions permanent?
A: In certain situations, placing a conservation easement on your property can be a win-win scenario. Your property will be conserved in perpetuity, and you may be eligible for federal income tax deductions.
Conservation Easement Basics
A conservation easement is a permanent, self-imposed prohibition on certain activities (often commercial or residential development) on a parcel of land. In a conservation easement transaction, a landowner (the “grantor”) places permanent conservation restrictions on its property. The easement is conveyed to a qualified holder (the “grantee” or “easement holder”), typically a land trust or a municipality, who assumes the obligation of monitoring and enforcing the conservation restrictions. Conservation easements in New Hampshire are authorized by RSA 477:45-47.
Conservation easements prohibit activities that undermine the conservation attributes of the protected land. These “use limitations” are spelled out in the easement deed, run with the land in perpetuity, and are legally enforceable against all future landowners by the easement holder. Grantors typically reserve certain rights that are permissible on the property, such as non-commercial agriculture and forestry.
Conservation easement transactions take many forms. Sometimes land trusts (through fundraising efforts, grants, etc.) raise the funds necessary to purchase a conservation easement for its fair market value. Easements are also oftentimes donated. A landowner who donates an easement, or a portion of the value in a “bargain sale,” may qualify for a federal income tax deduction, so long as the landowner complies with the Internal Revenue Code and Treasury Regulations pertaining to donated conservation easements. See, IRC § 170(h); 26 CFR § 1.170A-14. The amount of the deduction is determined by a qualified appraisal, and is based on the difference between the value of the land before the conveyance of the easement, and the reduced value after the easement is in place.
Conservation easement deeds in which the landowner is seeking a federal tax deduction are significantly more complex than those where no deduction is sought, and the IRS scrutinizes these easements carefully. As such, it is vital to retain legal counsel experienced with conservation easement tax issues to assist with the process.
Amending Conservation Easements
While conservation easements are intended to be perpetual, there are times, especially with older easements, where adding more restrictions, allowing certain uses that are not detrimental to the conservation purposes, or shifting the location of allowed structures, is desirable to both the landowner and easement holder. In such a case, an amendment may be sought. Amendments, however, are not encouraged and are scrutinized carefully, and therefore should be treated with caution. Most modern easement deeds contain amendment clauses that narrowly define the circumstances where amendments can be considered.
Under New Hampshire law, conservation easements constitute charitable trusts. Accordingly, they fall under the jurisdiction of the Director of Charitable Trusts (“CTU”) in the office of the Attorney General. Any amendment of a conservation easement requires review by the CTU.
The CTU has published guidelines for amending or terminating conservation easements, entitled, “Amending or Terminating Conservation Easements: Conforming to State Charitable Trust Requirements” (the “Guidelines”). Though not binding, the Guidelines are a helpful tool when analyzing the advisability and process of amending or terminating conservation easements.
Certain easement amendments, such as those involving complex issues or those that could result in potential harm to the easement’s conservation purposes, will require court approval under the doctrine of cy pres. The termination of a conservation easement, whether in whole or in part, will similarly require court approval.
In addition to the Guidelines, the recently adopted CTU regulations (specifically Jus 416) shed further light on amending conservation easements.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to email@example.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.