Costs and Benefits of Conservation Easements

Conveying a conservation easement on your property has both intrinsic and financial benefits for you, your family and your community. Several governmental entities (federal, state, and local) and private organizations have established financial incentives to encourage landowners to conserve their lands. These incentives include cash payments and various tax incentives that landowners can use to diversify or expand operations, pay down debt, pay expenses, and save for retirement. This document provides an overview of both the financial and non-financial benefits and the costs of conveying a conservation easement.

Benefits – Financial

There are five (5) types of financial benefits that can come from a conveyance of a conservation easement, (1) federal tax deductions; (2) Colorado state income tax credits;  (3) estate tax benefits; (4) property tax benefits; and occasionally, (5) cash payments. Each financial benefit is detailed below.

Federal Tax Deduction

The donation of a conservation easement may be treated as a charitable gift, making the value of the conservation easement tax deductible. The federal charitable tax deduction for the donation of a conservation easement is reduced by the value of any state tax credits received. After that reduction, you are allowed to deduct the donated amount up to 50% (100% for qualified farmers and ranchers)of your adjusted gross income, with a fifteen (15) year carry-forward period. If you receive state tax credits for 90% of the donated value of the conservation easement, the federal charitable deduction may only be the remaining 10% of donated value.

Colorado State Income Tax Benefits

Qualified private property owners from Colorado may be eligible for transferable tax credits for all or a portion of the conservation easement value. The conservation easement value is determined by a qualified appraiser. The value of the tax credits are 90% of the conservation easement value. The maximum owners can receive is $5M in credits, which can only be distributed in increments of up to $1.5M annually. Owners can then (1) apply the conservation tax credit against their state income liability; (2) transfer (sell) the tax credit to another taxpayer that needs it for their state income tax liability; or (3) claim a cash refund from the state in revenue positive years. Any portion of the tax credit not used in the year of donation can be used in the 20 years succeeding income tax years. No additional credits can be claimed until the original grantor or transferee have used or forfeited tax credits prior to 2014. There is an overall $50 million dollar cap per year for the tax credits. If the cap is exceeded, the landowner will receive a tax credit for a future year. Typically, tax credits are received 4 months after a complete application is submitted to the Division of Conservation, which is usually 5-6 months after the easement is recorded. Tax credit certification requires review by the State prior to generating any credits. NOTE: Landowners should sell conservation easement tax credits through a reputable tax credit broker. Brokers work throughout the year to identify buyers and match them with sellers. The sale of a tax credit generates taxable income.

Updates resulting from Senate Bill 24-126

The credit is now refundable in TABOR and non-TABOR years. Starting in 2027, landowners can claim up to $200,000 as a refund.

The credit percentage (the value of the tax credit as a percentage of the conservation easement value, as determined by a qualified appraisal) will decrease from 90% to 80% (of the conservation easement value) on January 2, 2027. This means you have 2 years to take advantage of the best incentives for conservation we have ever seen.

Estate Tax Benefits

When a conservation easement is placed on a property, most often the property value will be decreased and this will decrease the taxable value of the deceased’s estate.  In addition, if the easement qualifies under certain provisions of the Internal Revenue Code, then 40% of the property value remaining after the granting of an easement can be excluded from the value of the estate, up to a maximum exclusion of $500,000.

Property Tax Benefits

If the property is being taxed at the agricultural rate at the time the easement is placed, the landowner may continue to receive the favorable agricultural tax treatment even if agricultural production is discontinued in the future.

Cash Payments

Occasionally, EVLT can raise money from public and private funding sources to purchase a portion of a conservation easement with cash. The cash is received by the landowner at closing. This is known as a bargain sale conservation easement conveyance. Typically, 50% of the value of the easement is purchased in a bargain sale transaction. The remaining 50% is treated as a donation and compensated through the various tax benefits described above.

Benefits – Non-Financial

Landowners have different reasons for deciding to encumber their land with a conservation easement. Many of these reasons have nothing to do with the financial benefits described above and have everything to do with the landowner’s conservation ethic and the love of their land. Intrinsic benefits include the preservation of beautiful scenic vistas and our western heritage, fertile agricultural lands and water resources, as well as critical wildlife habitat and the animals who share the land as home. Conservation easements can also help to conserve a family’s legacy and prevent family disputes over what to do with property and provide the next generation an opportunity to participate in and enjoy our western heritage.

Costs – Financial

The conveyance of a conservation easement requires the following reports to be produced:

• A baseline inventory report documenting the current condition of the property
• An appraisal to determine the value of the conservation easement
• Mineral remoteness assessment to determine the likelihood of mineral extraction
• Title work
• In some circumstances
  • An environmental assessment
  • A water report if irrigation water rights are encumbered by the conservation easement.

In addition to the costs of these documents, there are other fees associated with the conveyance of a conservation easement including a project coordination fee, stewardship and legal defense endowment contributions, and various legal fees. Together, these fees typically range from $75,000 to $175,000, depending on the project. Bargain sale transactions are generally more expensive due to the increased complexity involved with funders and the additional due diligence requirements. A breakdown of transaction costs associated with a conservation easement is provided below.

NOTE: Landowners contemplating a conservation easement should also know that conservation easements can make it more difficult to obtain a mortgage. Landowners should consult with their banks/lenders to determine how they would handle a subsequent mortgage on a parcel of land encumbered by a conservation easement.

Costs – Non-Financial

Conveying a conservation easement can be a long, slow, and sometimes difficult, time-consuming process that can cause stress, frustration, and disagreement amongst family. This can be especially true in bargain sale transactions which tend to require more restrictions, cost more, and take longer. Moreover, landowners must consider that conservation easements will restrict certain uses of the property in perpetuity (forever), reduce options of future owners, decrease the value of the property, and potentially extend the time it takes to sell the property on the open market.

EVLT has strict confidentiality policies to protect landowners, but funders may require that information related to a conservation easement be shared with the public, and all conservation easements are recorded in public records. The location of all conservation easements is also shared with CU’s COMap service, which is available to anyone with a subscription.

This is a very important decision for you and your family. EVLT has plenty of information provided to help landowners educate themselves on conservation easements, and EVLT staff are available to spend time with landowners to review the details and costs and benefits associated with conservation easements. Ultimately the decision is yours – it is up to you to decide if a conservation easement makes financial sense and honors the legacy you are building through your property.

DISCLAIMER: This document does not constitute legal advice or opinion in any way and EVLT does not guarantee the accuracy of the information contained herein. Landowners should consult qualified independent professionals to obtain legal, financial and tax advice before concluding that a donation of a CE would be eligible for tax benefits.  EVLT will not knowingly participate in a project where it has significant concerns about the appraisal or eligibility of the CE to meet the requirements of applicable federal or state regulations. Even if EVLT accepts a donated CE and agrees in writing to recognize donation value, EVLT expressly does not guarantee, and makes no representations implied or otherwise, on legal or financial (including tax, estate, or real estate) matters, or that the transaction has donation value, or that the donation will receive tax benefits.