Local governments and conservation organizations sometimes buy conservation easements from landowners. Generally, if a landowner sells a conservation easement, he will owe taxes on the amount he receives. But, by using a transaction known as a like-kind exchange, a landowner may be able to defer taxes if he exchanges a conservation easement for other land. For example, a farmer can exchange a scenic conservation easement on his farm for an additional piece of farmland without triggering tax.

A like-kind exchange must satisfy a number of requirements before it can qualify for this tax benefit. Most importantly, the properties involved must be held for investment or for the productive use in a trade or business, such as agriculture. An experienced tax professional or the organization that will receive the easement can help landowners develop an easement that is appropriate for the land and landowner as well as structure the transaction to satisfy the tax rules.

Although the rules are complex enough to require professional advice, the idea of a conservation easement is really quite simple. Essentially, the landowner gives up the rights to develop his property by selling or donating those rights to a qualified charitable organization, typically a land trust or government agency, more on conservation easements ». The conservation easement usually reduces the market value of the land due to the landowner giving up the development rights.

A simple example illustrates how a like-kind exchange of a conservation easement works in practice. Meet Jon Howland, a dairy farmer in Pennsylvania who owns a pasture near a growing suburban area. Jon is feeling the pressure, but wants to keep the land in agriculture. He talks to his local county representative, who is also interested in protecting the open space from the encroaching development and maintain the agricultural character of the area. Jon is interested in pursuing a Purchase of Development Rights transaction for his pasture, after an appraisal from a qualified appraiser Jon finds out he cannot afford to pay the taxes on the sale of the easement. Jon receives some good advice from his local tax professional who suggests he agree to “sell” the conservation easement to the county in exchange for additional farmland. In this like kind exchange, the county will give Jon a tract of land that he can use in his farming business, such as additional grazing pastures or hay fields. While Jon will have to report the transaction to the IRS, Download IRS form, he will not owe any taxes on this transaction.

Jon can use this type of like kind exchange even if the qualified charitable organization he chooses to purchases the development rights does not own any property to exchange. The tax rules allow a neutral party known as a qualified intermediary to purchase property rights for Jon within certain time limits (45 days for identification and 180 days for exchange)

Therefore, Jon can sell the development rights in the form of a conservation easement to a local land trust to buy his neighbor’s farm. The proceeds from the easement will be given to a qualified intermediary to purchase the neighbor’s farm. The qualified intermediary industry is largely unregulated, so a landowner should be very careful in choosing a qualified intermediary.