Taxpayers who are looking to reduce taxes on the sale of their conservation easement often consider the possibility of entering into a Section 1031 Exchange in lieu of a straight sale. If the transaction qualifies, any capital gains taxes that would otherwise be due can be deferred until the sale of the replacement property. Among other requirements, a 1031 Exchange requires the seller to exchange the property for a property of “like-kind” in order to be eligible for 1031 Exchange treatment. The “like-kind” component of a 1031 Exchange can create confusion when specific rights to property, such as an easement, are exchanged instead of the all rights to the property.
An easement is the right to cross, enter, or use the property of another person. An easement can be granted for a wide variety of uses. Historically, a common use for an easement was by a utility company that needed access to power lines, drains or underground plumbing found on, above or under a private owner’s property. More recently, conservation easements have become popular. Ranchers and farmers in particular often sell conservation easements to unproductive land they own. Typically, a conservation easement allows the government, or a private conservation organization, to restrict the use and/or development on a tract of land in order to further conservation efforts. In return, the rancher or farmer receives income from land that was not being used.
Conservation Easement and State Law
How a conservation easement is treated for purposes of a 1031 Exchange depends, to a great degree, on state law. As with other exchanges involving rights to real property, the way in which the state law defines the purpose of the easement will be important in determining if the easement qualifies for an exchange. Private letter rulings have generally favored allowing conservation easements to be exchanged for a fee simple.
PLR 9621012, for example, found that a perpetual scenic conservation easement on ranch land was “like kind” with timberland, farmland and ranch land. Likewise, PLR 9851039 allowed an exchange of easements over two farms for a fee simple in another farm. Although rulings such as these have been encouraging for a taxpayer who wishes to exchange a conservation easement for a fee simple, it is important to remember that state law definitions play an important part in whether or not an exchange will qualify and that PLRs are not law-just opinions based on a specific set of circumstances presented to the IRS for an opinion.
Start Your Conservation Easement Exchange
As always, tax deferrals should be reviewed with your tax or legal counsel. Exchanging conservation easements, development, stewardship or mitigation credits are subject to State law and require adequate planning.
If you are considering a 1031 exchange of conservation easements, Atlas 1031 provides the accommodation services compliant with Internal Revenue Code Section 1031. Click below to begin a consultation or call our office at 1 800 227 1031 to discuss your conservation easement 1031 exchange.
