Tax Incentives Encourage Open Space Conservation

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Introduction

Residential and commercial development is the leading cause of conversionof oak woodlands over a relatively large area of the state. Oak woodlandshave the highest biological diversity of any major habitat type in the state.This is largely due to the landscape composition of these areas, with large,continuous blocks of extensively managed land. This conversion process hasresulted in fragmentation of these large blocks and a decrease in the landscapevalues of these lands, threatening a decrease in biological diversity inthe future.

This development pressure is fueled by the extremely high values forlots for homes and commercial properties, which greatly exceed the land'svalue for agricultural or natural resource uses. However, there are someopportunities for individuals who own oak woodland open space to voluntarilyconserve the resource values of their land in its current undeveloped state,while still receiving some financial benefit from its value as a developedsite. As open space in oak woodland continues to decrease, market-basedstrategies that allow landowners to recognize the values of their landswhile still providing the public values of wildlife habitat, watershed protection,and aesthetic value, need to be looked at more closely.

 

Market-based Strategies

An excellent book illustrating how market-based strategies can be appliedto reduce estate, income, and property taxes is available through the PeninsulaOpen Space Trust. It is entitled, Preserving California's Land: Incentivesfor Peninsula Landowners (see ordering instructions below). This excellentguide points out the importance of advance planning to ensure that openspace values are retained. It shows that the need to pay estate taxes doesn'tnecessitate the subdivision of land when the owners and their heirs desirethat it be maintained as private open space. The book shows how it is possibleto sell or donate some of the land's value without giving up the land itself.It should be understood that these benefits do not come without a cost.By receiving these tax benefits, some future rights to the property aresacrificed, reducing the owner's flexibility to change their mind aboutfuture management direction. This books makes extensive reference to theuse of conservation easements and gifts of land as mechanisms to utilizemarket strategies to conserve open space.

Conservation Easements — These are legal agreements torestrict activities that take place on land. Conservation easements arepermanent, and binding on all future owners. The land still belongs to thelandowner, although their rights to carry out some activities are reduced.The easement is usually donated or sold to a land trust or similar group.This is often a desirable strategy for open space conservation because theproperty still remains in private ownership, yet natural features are conserved.This donation or sale of part of the land's value affects income, property,and estate taxes. Landowners are often able to receive tax relief basedon the value of the easement, which is generally the value of the developmentrights given up. Easement restrictions are negotiated and can be quite flexible.A conservation easement may prohibit construction, but allow managementpractices such as livestock grazing or selective firewood harvest. Someeasements may even allow some cluster development with large blocks maintainedfor their habitat or open space value.

Land Gift — Another option to encourage open space conservationinvolves the gift of the land to a land trust or public agency. This requiresthat there is some important conservation value for the particular property.This strategy decreases the value of an estate, and reduces estate and incometaxes. The negative aspect of this strategy is that the land is no longerin private ownership, and will require regular, on-going investments ofpublic funds to support required management activities such as fuel reductionand habitat restoration.

Case Study

This publication provides an excellent series of case studies to illustratehow conservation easements or gifts of open space can be justified on thebasis of estate tax relief and reduction of annual income and property taxes.Shown below is one general example of an oak woodland case study providedin the text, and a series of alternatives illustrating some of the implicationsof different conservation strategies on a family's portfolio and tax burden.

General Description of Case Study

• 200 acre oak woodland in Peninsula foothills with a home
• Purchased 25 years ago for $100,000
• Currently surrounded by urban land
• Present land value is $5,000,000
• "Bypass trust" of $600,000 set up for surviving spouse and children
• $2,000,000 in other assets
• Annual adjusted gross income is $300,000.

Alternative 1 -- No Planning

• Husband dies -- No tax on trust or assets passing to wife
• Wife dies -- Combined federal and state estate tax estate is $2,968,000
• Pressure on heirs to sell all or part of property to pay taxes

Alternative 2 -- Conservation Easement

• Gift of conservation easement reduces value of oak woodland reduced to $2,000,000
• Receive average income tax benefits of $110,000 per year for 6 years (taxes reduced by 87 percent annually)
• Following death of second spouse, estate taxes would be $1,318,000 (decrease by 55 percent)

Alternative 3 -- Sale of Property

• Sale of property for development potential
• Tax on capital gains
• Following death of second spouse, estate tax on residual net worth
• Only 35 percent of estate value remains after taxes

Alternative 4 -- Retain Some Development Rights, Conservation Easementfor Rest

• Retain home and cluster development rights for 4 lots (Home worth $1,000,000; each lot worth $500,000) in low impact area of property
• Conservation easement for residual open space (almost 88 percent of property retained for open space and habitat value)
• Income taxes reduced
• After death, sell lots to pay estate taxes
• Net value to heirs virtually the same to heirs as alternative 3, plus open space is conserved

 

Summary

The principles illustrated in this book are quite practical in illustratingthe implications of open space conservation strategies on an individualfamily's net tax situation. It is quite a useful tool to show how an individualwith a large block of ecologically important oak woodland can receive someconsiderable savings in income taxes through the donation of some part ofthe development value of the property to a conservation easement. It alsoshows the importance of careful planning, and how some of the developmentvalue can be utilized while retaining a significant part of the open spacevalue of a property. Use of these tools needs to be considered by plannersand conservationists interested in ensuring that oak woodland habitat isretained in the face of escalating pressure for development in California.

 

Ordering Instructions

Preserving California's Land: Incentives for Peninsula Landowners, byAnn A. Duwe. It is available for $8.00 (includes postage, handling and taxes)from: Peninsula Open Space Trust, 3000 San Hill Road, Bldg. 4, Suite 135,Menlo Park, CA 94025, 415-854-7696. This material is also available on disketteto land trusts who are interested in modifying the material to fit theirgeographic area, and printing their own educational booklet. Check withthe Peninsula Open Space Trust for details.