A conservation easement is a conservation tax tool that allows you to take certain tax deductions when you transfer property rights, such as the right to develop, to a qualified charitable organization. Read more on conservation easements. Sometimes a local government or charitable organization will be interested in purchasing your conservation easement. Generally, this would require you to pay taxes on the amount you receive from that organization. But, by using a like-kind exchange, you may be able to defer real estate transfer taxes if you exchange the conservation easement for other land. For example, a farmer can exchange a scenic conservation easement on his farm for an additional piece of farmland without triggering tax.
A like-kind exchange must satisfy a number of requirements before it can qualify for this tax benefit. Read more on like-kind exchanges. An experienced tax professional and the organization that will receive the easement can help you develop valid conservation easements that qualify for a like-kind exchange.
Example: A simple example illustrates how a like-kind exchange of a conservation easement works in practice:
Meet Jon Howland, a dairy farmer who owns a pasture near a growing suburban area. Jon is feeling the pressure, but wants to keep the land in agriculture. He talks to his local county representative, who is also interested in protecting the open space from the encroaching development and maintain the agricultural character of the area.
Jon is interested in pursuing a Purchase of Development Rights transaction for his pasture, after an appraisal from a qualified appraiser Jon finds out he cannot afford to pay the taxes on the sale of the conservation easement. Jon receives some good advice from his local tax professional who suggests that he agree to “sell” the conservation easement to the county in exchange for additional farmland. In this like kind exchange, the county will give Jon a tract of land that he can use in his farming business, such as additional grazing pastures or hay fields. While Jon will have to report the transaction to the IRS, Download IRS form, he will not owe any taxes on this transaction.
Jon can use this type of like-kind exchange even if the qualified charitable organization he chooses to purchases the development rights does not own any property to exchange. The tax rules allow a neutral party known as a qualified intermediary to purchase property rights for Jon within certain time limits (45 days for identification and 180 days for exchange). The QI enables Jon to sell the conservation easement, who will use those proceeds to buy his neighbor’s farm.