Unit 23 Lecture Notes - Overview of Land Preservation Tools

Land preservation is a broad term that describes diverse goals. Preservation of open space has as its purpose to maintain an aesthetically attractive environment for humans. Preservation of land with unique geological or biological features preserves these features for the use of posterity. An example of a unique geological feature would be the point of highest elevation in a state or an unusual landform (Stone Mountain in Georgia - somewhat smaller nearby mountains no longer exist as they were mined for crushed rock). Biological features would include habitat for rare or endangered species of plants and animals. Land preservation may also be motivated by a desire to preserve recreational opportunities (e.g., hiking trails and public beach access). Farm and forest land may be preserved to promote those industries, preserve local sources of agricultural properties, and to protect the environment, particularly water quality.

As noted in the unit on nuisance, a private nuisance action is a tort action. Under the common law, the issue of whose land use was first in time was irrelevant to the question of whether a nuisance existed (although the court could consider that issue at the remedy phase of the trial). This is called the coming-to-the-nuisance rule. Recall that a nuisance is an unreasonable interference with one land owner's use of his property by another landowner. North Carolina's right-to-farm law reverses the coming to the nuisance rule as to farms that have been in business for more than one year. If a farm falls within the protection of this rule the judge must dismiss any nuisance action brought against it. Under certain circumstances a farm will not be afforded the protection of the rule. These circumstances include where the farm has caused pollution or change in the condition of a stream, overflow of lands, negligent or improper operation, farms within city limits on the day of enactment of the rule, and farms that have so substantially altered their operations that they should be treated as new farms.

Any time a person wishes to file a nuisance action against a farm it must engage in mediation before filing suit. Where mediation was not attempted the judge must dismiss the suit. If the mediation fails the plaintiff may then file his lawsuit.

Of more direct relevance to preserving farm, forest and horticultural land is the use value tax program. Under this program qualifying land is taxed at the value of its use in agriculture, forestry or horticulture rather than at its fair market value. Where the difference between fair market value and use value is great, this program can be a very important tool that allows landowners to continue to use their land in agriculture, forestry or horticulture. To participate a landowner must make application to the county tax office for the county where the land is found and meet all requirements of the program. Conversion to a nonqualifying use results in payment of additional tax in the current year plus the payment of the tax foregone in each of the last three years.

North Carolina also has statutory authority that permits counties to operate voluntary agricultural district programs. County commissioners may establish a program by enacting a voluntary agricultural district ordinance. Each ordinance should set minimum criteria for participating farms and establish an agricultural advisory board to review applications from landowners. Conservation agreements are for ten years and revocable at any time by the landowner. There are several benefits of participating in a voluntary agricultural district program. When a state or local entity proposes the condemnation of land in a voluntary agriculture district it is the responsibility of the agricultural advisory board to hold a public hearing on the proposed condemnation and make recommendations to the condemning authority. The county may also waive water and sewer assessments on property within the district. Buyers of property within close proximity to land in an agricultural district are put on notice that they are buying near a voluntary agricultural district. The benefit of this is, that should a court find that a farm is a nuisance, the existence of record notice to the plaintiff will reduce potential damages.

The same act that created the agricultural district program also authorized counties to enact ordinances that allow purchase of agricultural conservation easements. It created the N.C. Farmland Preservation Trust Fund (the Fund) to provide cost sharing money to counties that wish to purchase agricultural conservation easements. Cost share money from the fund is provided based upon the county's economic tier and whether the county has a countywide farmland protection plan.

A conservation easement is an interest in real property that prevents the development of that property. These are typically created under the Conservation and Historic Preservation Agreements Act. Conservation easements may also be created under other law including the 1996 Farm Bill (Conservation Reserve Enhancement Program and Wetlands Reserve Program), the Migratory Bird Hunting Stamp Act, and through mitigation agreements under Section 404 of the Clean Water Act. However, these conservation easements created under other law often have fewer or no tax benefits compared with those easements created under the Conservation and Historic Preservation Agreements Act.

Either a unit of government or a land trust may hold a conservation easement. A land trust is a private nonprofit organization set up under IRC §501(c)(3) of the Internal Revenue Code. Since the creation of a conservation easement is a real property transaction all of the formalities in any real property transaction must be observed. The landowner must have good title to property that is free of security interests, hazardous waste, and abandoned underground storage tanks. If the landowner is married then the landowner must obtain the agreement of her spouse. The agency receiving the conservation easement must be satisfied that title is good and must conduct due diligence to set up the 'innocent landowner' defense to CERCLA liability.

To create a conservation easement a deed must be prepared and recorded. The deed must include a legal description of the physical boundaries of the easement as well as the restrictions on the use of the property that have been included in the easement. The landowner and the receiving agency must allocate costs between them. The landowner and agency should agree on a plan for transferring rights and educating subsequent owners of the property.

It is also wise to include a dispute resolution mechanism in the conservation easement. Arbitration and mediation are alternatives to litigation.

Application of a conservation easement to property will usually significantly reduce tax liability. Since application of a conservation easement usually has the effect of substantially reducing fair market value, the property tax, that is based upon fair market value, will also be reduced. Where the landowner is already using use valuation, the reduction in property tax may not be significant.

Where a conservation easement is donated either to a government or to a land trust, the fair market value of the conservation easement may be deducted on the federal income tax return as a charitable deduction. Donors are allowed to deduct the fair market value of their gift as opposed to the basis (essentially what was paid for the property). Since the unrealized gain is never taxed, this is an added benefit. A charitable deduction on the state income tax return, that tracks the federal, is also available. Generally the charitable deduction in any given year is limited to 30% of adjusted gross income (AGI). Both the federal and state income tax systems allow the excess deduction to be taken over the subsequent 5 years' tax returns.

The state of North Carolina also permits a tax credit on the state income tax return for donations of either conservation easements or fee simple interests in real property. The credit is equal to 25% of the fair market value of the gift up to an annual limit of $250,000 for individuals and $500,0000 for corporations. As with the deduction, the excess credit may be spread over the 5 succeeding tax returns. Both the charitable deduction and the tax credit may be taken without offset. The credit is limited to the following qualifying uses: access to beaches, access to public waters, access to public trails, fish & wildlife conservation, and other land conservation purposes. Application of the credit is not automatic; the landowner must obtain a qualifying letter from the Department of Environment and Natural Resources (DENR) that indicates a qualifying use, a qualifying recipient (government or land trust), a qualifying interest (fee or conservation easement), and that there is no reversion of the interest, that was donated, back to the landowner.

Conservation easements may also be donated after a person dies. A charitable deduction (see "exclusion for land subject to conservation easement" under "Federal Estate and Gift Taxes" section of Effects of Federal Tax Policy on Agriculture) is then taken on the estate tax return. Where land subject to a conservation easement is part of an estate, the estate may reduce the fair market value of the land by 40% - up to a limit of $500,000 of the fair market value of the gross estate.