What is “conservation easement”?

[Melanie Baldridge]

There is a unique tax deduction in the US called a “conservation easement.”

It was designed by the IRS to encourage real estate owners to make pristine land, that could be enjoyed by the public, a conservation ground, and thus un-developable.

In return, the landowner could treat the act of granting a “conservation easement” as tax-deductible.

It would be similar to a charitable gift.

In a conservation easement, a real estate investor “donates” development rights on a piece of property to a qualified charity, public agency, or land conservatory.

In return for the donation, they get a tax deduction as if they gave cash to a charity.

Let's dive into the basics.

Let's say you buy a 20-acre piece of real estate that includes a 5-acre self-storage facility.

The rest of the land isn’t really easy to build on so It is virtually worthless to you.

Let's say you paid $5MM for the facility based on NOI and the land came with it, virtually free.

So you decide to get the property appraised for development value and donate it to a land conservatory.

The appraiser runs some comps on other land recently purchased to get you a value.

They come back and tell you the current development value of that land is $50,000 an acre.

$50,000 times 15 acres equals $750,000.

You give that $750k development right to an agency, and It is treated as if you gave $750k to the Red Cross.

It's a huge deduction.

Depending on your tax bracket, that tax deduction could be worth several hundred thousand dollars to you.

It's a pretty big deal.