Conservation Easement- Hey there. I’m Mike Acquisto Real Estate broker and co-owner of Acquisto Real Estate. And we’re going to be speaking about conservation easements. We’re going to cover the who, the why, the how the what the how much and what’s going on as far as conservation easements go here in very short order.
So the first thing is what is a conservation easement and where could I get some more information about it? So we have provided some of that information down below in the description.
So go ahead and roll down there and you’ll be able to grab some of the Web sites that we will speak about and they’ll all be located nice and easy for you. And as we go through, will be chatting and some links that you can follow with. So we do have a couple of handouts that we’re going to have as well and show off on the screen. But let’s start with a very good resource with the Montana Land Reliance or chat in that. And we’ll go ahead and share the screen and show you some information from them.
Conservation Easement
Let’s see if we can do that for Moncure.
Perfect, so here we are, the Montana Land Reliance. This is a nonprofit entity in the state of Montana. Now, I’m a little bit more familiar with this one being a Montana real estate broker myself. I do utilize them more often for resource information. And there will be a state agency or a nonprofit agency that tries to assist this in most states, including the state of Texas.
That will also have for you a little bit later on. So the state of Montana, this one was started in 1978. And what they have is their goal is to help conserve land for property owners and give tax benefits to landowners who voluntarily restrict some of the bundles of rights that they own as property owners. OK, so what does that even mean? So what it means is when you purchase a property, you’re probably aware that there are surface rights in subsurface rights.
And those are the two things that you kind of think about in a traditional residential real estate transaction. But like most of the subsurface rights have already been transferred. So now you just think about like, well, there’s a home and I live in it. Right. Well, there’s a lot of opportunity here when you talk about raw land and what those opportunities are. So the bundle of rights you have is how you develop it in what you would put upon that property. So I’m going to have Omkar just be scrolling through here and you can see some different items about the land reliance that they do.
But the basic concept is if you owned a bunch of land, let’s say you owned one hundred acres, you would have a bunch of different options on how you would develop it. You could put in high density stuff. You could put in low density. You could put in commercial, you could put in residential. And there’s always a highest and best use of that land, whatever that happens to be. And for that, there is like a complete value. That would be that the property would be worth on an appraisal basis. And if you’re looking at it, if you voluntarily restrict or remove these different rights that you would be able to have as a property owner.
So, for example, if you owned one hundred acres and the zoning allowed you to put in one property, one residential unit per acre, then you would be allowed to put in a hundred units within this acreage. So just go with me and assume this. I know there’s some other details in there, but let’s assume that you could put in one hundred lots or one hundred residential units on one hundred acres because you’re allowed to do that one per acre. If you voluntarily restrict yourself and say, I am going to only put in one property on this one hundred acres and you’re going to voluntarily lessen the economic viability of your own property than you are due a tax credit to offset the
permanent permanent meaning like Perpetual, always standing forever on this property, the opportunity to put more in. So in doing that, you’re essentially making the worlds or the states or the federal resources for land more scarce and you’re removing them from play.
So what happens is you are going to be offset because you’re conserving resources, making others more valuable and making that there’s a scarcity of whatever this happens to be. So if you do that, then you get an appraisal on your property.
Before for full economic viability and after for what your property is like when it’s conserved or not fully utilized, you as a property owner would have the opportunity to restrict as much or as little you could do it, that it’s temporary, but if it’s temporary, you don’t get the proper tax credit and sometimes you’re really looking for the tax benefits. So right here we have some of the tax benefits that you would be looking for. Right.
And you could restrict yourself in many different ways, whether or not you mine on it, whether or not you might need it for certain resources, whether or not you put livestock, cattle grazing, whether or not you divided it with a fence, whether or not you had five units, 10 units, whatever that happened to be.
And by doing that, you’re reducing the value of the property. So essentially, they’re going to take the highest economic value according to an appraisal of what that property is worth and what the new value of the property is with these new encumbrances or restrictions that you’re voluntarily placing upon it. In this independent organization that is a nonprofit called Montana Land, Reliance in this particular case will assist you and walk through that complete scenario in assist you. And it takes about.
So right now we’re in January, at the end of January. Typically people start in about May for that calendar year. And you have to have it completed by September so that you can file it and get that tax benefit for the following year. So there’s a timeline on how long it takes and there’s a cost associated with it. You’ll have to provide new appraisals before and after, and you’ll have to defend each of these different validations. But what you will receive at the end is a tax benefit or tax credit to offset your income tax that you can use all in one year or gradually over this year, this tax year and 15 subsequent tax years. So this tax credit will go against your income. So what does that mean?
It means that if you, as an example, made the using round numbers, if you made a hundred thousand dollars a year and that was your AGI or adjusted gross income, if that was that particular item, then what would happen is if you voluntarily encumbered your property or conserved your property, you would have a lower value for your property. So let’s say in that scenario that you had a property that was worth a million dollars and you voluntarily put less upon it. We talked about that scenario in which you had a hundred, the opportunity to put one hundred units on and you only put one on.
So in that case, you are dramatically conserving the properties or the resources. So the property value might go from a million dollars down to, let’s say, one hundred thousand. OK, so now you have lost nine hundred thousand dollars worth of value in your property because you can only put one unit there in this particular case. OK, so now you have restricted yourself and lost nine hundred thousand dollars on paper value. Now maybe you really want only to have one property on this hundred acres where you could have had one hundred and you’d think that’s best for you and that’s what you really want.
So in doing so you’re going to receive an offset of a tax credit of that nine hundred thousand dollars that you can utilize against your AGI or adjusted gross income. That number can be taken all at once in one year. But this particular scenario we talked through and we said that you had an income of one hundred thousand dollars on an annual basis, assuming that your income was the same every single year, then what would happen in this scenario is your nine hundred thousand dollars would be able to utilized one hundred thousand dollars for the first year.
And if you continue to do that, it would take you eight additional years for that tax credit to be fully utilized. What that will do is offset your income and give you the benefit of not paying tax or a tax reduction on that income that you normally would have paid to the federal government.
So what you would have is a property that now has the ability to only put one property upon it. And we’ll look over here at conservation easements. So link that producer all will chat in for us has a lot of nice pictures. So it’s often really nice to. Look at something like that, but these pictures will be present for you and the information about it so you can understand if you like to read instead of listen. But essentially what we’re doing is restricting the property, receiving a tax benefit for it.
The speed in which you receive your tax benefits are going to be based on what category you happen to fall into. If you are a farmer and rancher and you derive at least 50 percent of your income according to from farming and ranching, then you can receive one hundred percent of that benefit all in one year. If you are not a qualified rancher or farmer yourself for income, then you’ll be taking that at a 50 percent deduction each year. So what does that mean? We talk about that nine hundred thousand dollar number just a moment ago. And if you made that nine hundred thousand dollars and you were not primarily a rancher in this particular case
and you could only use 50 percent of the tax credit on an annual basis, so that number would continue to run. So we talked about the fact that you would be using one hundred thousand the first year and then using it is eight hundred thousand dollars over the next eight years for that number.
In this particular case, if you’re not a qualified rancher or farmer, then you would only be able to use 50 percent of it or fifty thousand dollars on an annual basis. And you would pay tax on 50 percent of your income to write it down, if that’s the particular case. So it would take you an extended period of time to fully utilize that you could stage when you donate or conserve your property and work on a staged benefit to ensure that you receive your tax credits. And they are fully, fully utilized and recognized.
So you could encumber half of your property at once and then do the rest of it later if you thought that was in your best interest. This number doesn’t matter what type of income you have, whether it happens to be income that is derived or generated from whatever tax rate, that doesn’t matter. It all counts the same. If you happen to have the highest possible tax rate, that’s absolutely fine. If you’re an entertainer, an athlete, you have different tax rates, you have windfall earnings, you have whatever those items are.
You can utilize this against all of that income. Short term capital gains, long term capital gains, doesn’t matter. It’s all treated the same. Now, you would have the useful ownership of this property. You don’t have to go ahead and take and conserve your property and make it a park.
You can still restrict it under the terms that use the property owner decide you want to do so. If you want to allow people on the property, well, I guess sense your ownership interest and you could totally do that if you’d like to restrict it where it still remains. Private property, probably a great idea, right. So you decide what you want to retain and as you give up more rights or more bundles than you would receive more tax credit or tax offsets. OK, so that’s a lot of information for you. It is very, very beneficial when you have large tracts of land, when you have price appreciations and when you would like tax credits to offset your income.
And in scenarios which you have people that want to remain private or are OK with these restrictions, as an agent, the places and times when you would like to utilize this would be when you hear that a person has a high taxable income or the desire to own a lot of land or the desire to be private or the desire to restrict or to conserve. There’s a lot of different times. Right. So this is a way as you as an agent could assist a person in offsetting their tax benefits over a period of time. Once this is done, it will in theory decrease the value of the property.
But I’m not positive that that’s the long term item that would actually take place. I believe that people want to have space and have. Clarification on what would go on within that property that they purchased or properties around them, so if you are interested in something like that, you want to have a lot of property, we can absolutely assist you with that as an agent. Just know that it exists, know that we do understand this concept, totally know that you will be working with a qualified attorney to assist.
You know that you definitely are going to need to have an appraiser, an experienced agent and somebody who is on your side that cares. Costs associated with filing one of these is going to be about fifty thousand dollars and it’s going to be twenty thousand dollars for a donation to the land reliance to be able to assist you. Ten thousand dollars for an appraisal ish and an additional twenty thousand dollars for all the filings, for all the paperwork, for the documentation, for the attorneys for the time that it takes to go ahead and complete this.
So, ladies and gentlemen, that is a bunch of information there for you. We did provide you with a couple of different links. We did scroll through a bunch of different items. I hope that you enjoyed today’s TNT session, just you and I.
