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Landowner Considerations Regarding Conservation Easements

Thomas R. Kelsey 713-968-2217 713-622-6158 (fax) Tkelsey@blmlaw.net


Copyright 2011 Thomas R. Kelsey All Rights Reserved

11/29/11

What is a conservation easement?


An agreement between a landowner and a land trust Permanently restricts the type of development Created by Section 170(h) of IRC and Chapter 183 Texas Natural Resources Code
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How does it work?


1,000 acre hill country ranch valued at $3,500/acre $3,500,000 before and after value When subdivision potential eliminated value is $1,750/ acre $1,750,000 Charitable deduction -- $1,750,000 No restrictions against agricultural or recreational uses Reserved building sites maintain flexibility No public access State and Federal government have no regulatory involvement
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Why would one consider a conservation easement?


Preserve conservation values Prevent heirs or subsequent third parties from ranchetting family farm or ranch Income tax benefits Estate tax benefits Gift tax benefits Ad valorem tax benefits All of the above 11/29/11

What are the income tax benefits?


Donor is entitled to charitable deduction for difference between before and after value Example of 1,000/acre ranch Need to hire an appraiser Before value -- $3,500,000 valued at $3,500/acre After value $1,750,000 valued at $1,750/acre Charitable deduction -- $1,750,000 Deduction up to 50% AGI for 2011 Holding period issues Deductible in year of donation plus 15 years Net tax benefit approximately $525/acre Proposed Senate and House bills to extend additional tax incentives beyond 2011. Audit rate issues 11/29/11

What are estate tax benefits?


Reduced value from $3,500,000 to $1,750,000 Saves $612,500 estate taxes based on 35% rate 35% tax rate and $5,000,000 exemption for 2010-2012 Section 2031(c) IRC excludes 40% of $500,000 or another $200,000 of value from estate tax calculation Lowers value for making gifts
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What are ad valorem tax benefits?


Most landowners qualify for ag-use or open space (wildlife management)

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What are disadvantages of conservation easements?


Perpetual restrictions limit flexibility for landowners and future generations May restrict ability to finance requires subordination Elimination of development potential reduces market value Expense of completing easement fees from attorneys, accountants, appraiser and maybe surveyor Stewardship fee mini endowment for land trust No surface mining for gravel, caliche, etc. May have issues with oil and gas production
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What are advantages?


Preserve conservation values for future generations family farm or ranch wont be ranchetted Tax advantages Income tax deduction ($1,750,000 deduction in example) Estate and gift tax benefits Can continue existing uses for agricultural and recreational purposes Maintain limited residential use with reserved building sites No public access
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97% of Texas lands are privately owned Ownership in senior generation Unless planning used, lands will be sold to pay Uncle Sam and most likely fragmented Texas A&M Study on land fragmentation http://txlandtrends.org Texas megapolis from Beaumont to San Antonio to Dallas one metro area Losing our farms and ranches Loss of agricultural production Loss of wildlife habitat Loss of quail, doves, waterfowl, deer, etc. Decline of hunting as a family heritage
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Land conservation issues

What can be done to preserve Texas Open lands?


Almost 50 land trusts in Texas now protect acres with 444,309 acres of conservation easements in 160 sites and another 184,653 acres owned in fee in 191 sites. Katy Prairie Conservancy protects 18,000 acres Use of PDRs for land-rich cash-poor farmers and ranchers Katy Prairie example Farm Land Protection Policy Act (USDA) 1,200 acres protected for $900,000 -- $750/acre Texas Farm and Ranch Conservation Council formed by Governor Perry Bayou Land Conservancy operates in 13 county area around Harris County www.llt.org
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See website for Land Trust Alliance www.lta.org See website for Texas Land Trust Council (TLTC) www.texaslandtrustcouncil.org Call Texas Land Trust Council 512-236-0655 or noni@texaslandtrustcouncil.org TLTC web site Conservation Easements: A Guide for Texas Landowners
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Texas Nature Conservancy www.nature.org/texas Katy Prairie Conservancy www.katyprairie.org

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Landowner Considerations Regarding Conservation Easements


Thomas R. Kelsey 713-968-2217 713-622-6158 (fax) Tkelsey@blmlaw.net
Copyright 2011 Thomas R. Kelsey All Rights Reserved

11/29/11

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