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Death Tax and Conservation Easements

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  • Death Tax and Conservation Easements

    The death tax is a tax many landowners, farmers, ranchers, business owners, and their heirs are faced with at time of death. The death tax, when owed, often forces heirs who inherit land to sell the land they inherit. In such cases, heirs are forced to sell the family farm or ranch to generate money that is needed to pay the taxes due at death.

    Some landowners consider putting conservation easements on their land. A conservation easement, they may think, will devalue the land and devalue the size of the estate at time of death. This, the landowner hopes, will allow their heirs to keep the family farm or ranch - the family business - in the family for future the next generation and for future generations to come. Therefore, the conservation easement may be a tool that will help the landowner reduce exposure to the death tax.

    Conservation easements, some say, help keep land in the family at time of death. Others say this may not be true. In fact, opponents say conservation easements can be risky and go so far to say they are a mistake and they can be a poor financial decision. And other folks aren't sure what the issues are or what's may be at stake.

    A conservation easement can be created by a landowner giving up rights in the land in exchange for tax credits. Real estate includes a bundle of rights. The bundle of rights may vary property to property. And these private property rights can be separated. Property rights may include water rights, air rights, building rights, development rights, and other rights.

    Conservation easements are created when the landowner gives up specific rights he or she has and, at the same time, he or she gives up all future owner's rights in the land - such as the right to build or develop. Or, the right to use his land certain ways. Or, the right to use natural resources on the land, may be given up and lost forever. In exchange for these rights - the landowner may receive income tax credits or breaks toward future income.

    If a parcel of land is worth $1,000,000 and the value of the conservation easement is thought to be $600,000 in tax savings to the landowner, the landowner may get a $600,000 income tax credit to be used over the next 6 years. So, if the landowner is retired or low or middle income, and does not owe much in income taxes over the next 6 years, then this is not be a viable business decision. Tax credits not used are lost.

    Depending on the situation and individual needs, a landowner may be better off to forget about conservation easements. Instead, keep the rights he or she has in his real estate. Then go secure the entitlements to develop the property. Securing entitlements now may add more value to the property once in place, and later. And, the landowner should do this while the rights remain available to secure. Many landowners don't do this and later find because of zoning changes over time rights may be lost. While working to secure these entitlements and rights, the landowner can continue to use and own his land just as he always has. When the time is right, he or she can consider selling some or all of the land with those rights intact. This may produce more value and more than offset the potential that may or may not have been saved in income taxes if income taxes are due in coming years.

    Lenders may be reluctant to loan a landowner money if a conservation easement. Such an easement may be a loud on the title. In addition, the bank may feel that the development rights that have been lost represent the greatest value in the land. They may also be concerned that the land lost much of its ability to receive good appreciation of those values of the future prospect of developing the land. A farmer or rancher may find it hard to borrow money to operate a successful commercial farm or ranch. Proponents may say that conservation easements are nice and therefore valuable to a bank. They may even say that conservation easements do not devalue land or that the devaluation is absorbed in the market over a few years. If your not sure - ask your banker, a competent attorney, a qualified land appraiser, and the the IRS what they think the affects may or may not be.

    Conservation easements are complicated. Every property and every situation is different. A respected land broker recently stated that many conservation easements the IRS is challenging, are failing. If you do a conservation easement for tax credit and your audit goes poorly - what happens to your expected or realized tax credits? What happens to you and to your land? You need to be very careful if you are considering a conservation easement. Be sure you have a good attorney, a good accountant, a good real estate broker, a good land appraiser, and a good financial planner. Get good advice. You need to have a team of top quality professionals advising you. The waters can be rough. Knipe Land Company is a farm and ranch real estate firm with nearly 70 years or land brokerage and land related, real estate experience, representing generations of landowners. If you are buying, selling or considering conservation easements on your land to meet your unique challenges, Knipe Land Company may be able to assist you in finding solutions right for you and your family.

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