Anyone interested in the outdoors knows the importance of land conservation for recreational, educational and wildlife preservation purposes. Alabama's undeveloped lands provide a host of recreational opportunities - everything from fishing and hunting to bike riding. Undeveloped lands also provide a habitat for this state's abundant wildlife. Restrictions on development in Alabama can ensure that both the public and wildlife will continue to enjoy these lands. Conservation can also yield specific benefits to Alabama landowners in the form of tax incentives. Thanks to recent changes in federal regulations, there are now more options for landowners to obtain beneficial tax breaks through "conservation easements." Anyone who owns undeveloped land should be aware of these options, which allow landowners significant estate and income tax benefits while contributing to the worthy cause of conservation.

Conservation Easements

A conservation easement is a restriction placed upon privately owned land that permanently bans most types of development. In return for granting conservation easements, landowners become eligible for estate tax breaks of up to 40% of the value of the land subject to a qualified conservation easement. These estate tax exclusions can save a landowner as much as $500,000. In addition, conservation easements that qualify for estate tax benefits will generally also qualify as charitable contributions resulting in income-tax deductions, if the conservation easement is granted in the landowner's lifetime. Therefore, a single conservation easement can result in both an estate tax exclusion and an income tax deduction.

Due to recent amendments to the Internal Revenue Code, landowners now face fewer restrictions on the lands that are eligible for easements. Before January 1, 2001, land that could be used for a conservation easement estate-tax exclusion needed to be located:

(1) In or within 25 miles of a metropolitan area.
(2) In or within 25 miles of a National Park or Wilderness Area designated as part of the National Wilderness Preservation System.
(3) In or within 10 miles of an area that is an Urban National Forest.

However, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) eliminated these distance requirements. Today, any land within the U.S. or a U.S. possession is eligible for a conservation easement. The only qualifications are that it must be land: a) which was owned by the decedent or a member of the decedent's family at all times during the three year period ending on the decedent's date of death; and b) with respect to which a "qualified conservation easement" has been granted, as of the date of election, by the decedent, a member of the decedent's family, the executor of the decedent's estate, or the trustee of a trust that holds the land to be subject to the qualified conservation easement.

To meet the criteria for a "qualified conservation easement," certain requirements must be satisfied. First, the easement must restrict the use of the property in perpetuity so that the conservation purpose is upheld. Second, the easement must be made to a "qualified organization." A qualified organization may be a government entity or a public foundation (which the family may have established) that is organized for the specific purposes of conservation. The organization must have a commitment to maintain the easement's conservation purpose, and the resources to enforce restrictions on that land. Third, the easement must serve one of three conservation purposes:

(1) The preservation of land for outdoor recreation by, or the education of, the general public.
(2) The protection of relatively natural habitat of fish, wildlife or plants, or similar ecosystem.
(3) The preservation of open space, including farmland and forest land.

Exclusion Valuation

The value of a qualified conservation easement depends upon which is less: a) the "applicable percentage" of the value of the land subject to the qualified conservation easement, or b) the $500,000 maximum set for tax exclusion. The applicable percentage for the easement is 40%, reduced by two percentage points for each percentage point by which the value of the qualified conservation easement is less than 30% of the value of the land. A conservation easement should not be valued at 10% or less of the value of the land (before the easement is made); in such a case, the applicable percentage is zero and no tax exclusion is possible.

Example: Certain land is worth $1 million before any conservation easement. After an easement is made, the land is worth $750,000. Therefore, the value of the conservation easement is $250,000. Because $250,000 equals 25% of $1 million, which is less than 30%, the applicable percentage must be less than 40%. By taking away two percentage points for each of the five percentage points by which the value of the easement is less than 30 % of the value of the land, we arrive at a 10% reduction in the applicable percentage. The applicable percentage is reduced to 30%. The conservation easement's tax exclusion applies to the lesser of either $225,000 (30% of $750,000) or $500,000. In this case, $225,000 is the allowable tax exclusion.

Dual Benefits

It is unfortunate that society's efforts to protect the environment and to maximize economic gains often seem to be at cross purposes. The enactment of the EGTRRA has made it easier for landowners to benefit themselves and the environment through a single strategy. A conservation easement can be a valuable tool for anyone who owns an estate with undeveloped land and wants to keep that land "in the family." By doing so, landowners can also preserve Alabama's scenic beauty and outdoor adventures for future generations.