Taxes and how they are affected by a conservation easement

The information below describes new estate tax benefits and has been reprinted from the Land Trust Alliance. For more information please log on to

Land Trust Alliance
1331 Street, NW Suite 400
Washington, DC 20005
Tel: 202-638-4725
Fax: 202-638-4730


New Conservation Options for Heirs to Land    

The donation of a conservation easement by a landowner can be an effective means to reduce estate taxes on lands. Section 2055(f) of the Internal Revenue Code (I.R.C.) allows donations of qualifying easements to a public charity such as a land trust to be deducted from the taxable value of an estate.

Section 508 of Public Law 105-34 (the Taxpayer Relief Act of 1997) created another benefit for donations of easements, I.R.C. section 2031(c). This benefit can reduce the taxable value of an estate an additional amount, up to $500,000. This section of the code can be confusing because of the way it is worded. But it does work, and the IRS has confirmed its operation in letter rulings and in practice. Taken together, 2055(f) and 2031(c) create a powerful incentive for conservation which no one who owns land with public value for open space, agricultural preservation, wildlife habitat or recreation should ignore.

Section 6007(g) of the Internal Revenue Service Reform Act (H.R. 2676), signed into law on July 22, 1998, extended these benefits in a new way. Under this provision, when a landowner dies without having donated a conservation easement, his or her heirs may be allowed to elect to donate a conservation easement on the inherited lands and get these estate tax benefits post-mortem.

Getting this post-mortem option requires qualifying for the 2031(c) benefit, and this requires

I.R.C. 2031(c)  

Section 2031(c) of the Internal Revenue Code allows beneficiaries to exclude from the taxable estate 40% of the otherwise taxable value of land subject to a qualifying conservation easement. The exclusion is limited to $400,000 in 2001, and increases to $500,000 in 2002.

Under I.R.C. 2031(c), the percentage of the value of a piece of land that can be excluded from an estate is reduced below 40% when the easement itself is worth less than 30% of the total value of the land. Retained development rights are fully subject to estate tax, but payment of the tax can be deferred for up to two years.

What land qualifies?  

As passed in 1997, IRC 2031(c) applied only to certain geographic areas near metropolitan statistical areas, national parks, federally-designated Wilderness Areas, or Urban National Forests (a designation of the U.S. Forest Service). But section 551 of the tax bill enacted in 2001 (H.R. 1835, P.L 107-16) eliminates those restrictions, making property anywhere in the United States eligible. That law also makes it clear that the values to be used to determine what percentage of the property's value is encumbered by the easement are the values at the time of donation.

The land must have been owned by the decedent or a member of his family for three years prior to death. Property subject to a mortgage is eligible for the 1997 exclusion only to the extent of the net equity in the property. The value of structures cannot be counted in any way in applying these provisions -- only the value of the land.

Generally, the value of rights retained to use the land for commercial purposes cannot be excluded from the taxable estate. However, the value of retained rights that are "subordinate to and directly supportive of the use of land as a farm" may be excluded. Such uses include timber cultivation and harvest.

What easements qualify?  

To qualify for these benefits, easements must first qualify for a deduction under section 170(h) of the I.R.C. They must be perpetual conservation easements, donated to a public charity such as a land trust, or to a governmental entity. The easement must protect outdoor recreation or education resources, wildlife habitat, or open space "for the scenic enjoyment of the general public or in fulfillment of a clearly delineated public conservation policy." Easements solely for the purpose of historic preservation qualify under section 170(h), but they do not qualify for the benefits of IRC 2031(c).

To qualify for IRC 2031(c), an easement must also prohibit all but "de minimus" commercial recreational activities. The authors of the provision, however, did specify in the legislative history of the 1997 bill that they did not intend hunting or fishing to be considered "commercial recreational activities."

Who claims the benefit?  

IRC 2031(c) can be the result of a conservation easement donated in a will or prior to death. But where it is the heirs who are making the donation, the executor must make an irrevocable election to take these benefits. Such an election can be made only if the easement is placed on the land by the executor or beneficiaries before the filing of estate taxes -- generally nine months from the death of the decedent. Land excluded from estate tax under this provision will receive a carryover basis rather than a stepped-up basis for purposes of calculating any gain on a subsequent sale.

What else should I know?  

The existence of the post-mortem option is no substitute for good estate planning by a landowner. The power of an executor to make a post-mortem donation of an easement may be limited by state probate law1, and a disagreement among heirs could easily frustrate the use of these provisions to preserve family lands from development. In addition, good estate planning by a landowner can yield substantial additional benefits including income tax deductions under I.R.C. section 170(h), which are not allowed in cases where estate tax benefits are taken for easement donations made post-mortem.

Landowners should always consult a qualified attorney in dealing with the particulars of their own situation.
Russell Shay
Director of Public Policy
Land Trust Alliance
August 16, 2001