Residential and commercial development is the leading cause of conversion of oak woodlands over a relatively large area of the state. Oak woodlands have 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 has resulted in fragmentation of these large blocks and a decrease in the landscape values of these lands, threatening a decrease in biological diversity in the future.
This development pressure is fueled by the extremely high values for lots for homes and commercial properties, which greatly exceed the land’s value for agricultural or natural resource uses. However, there are some opportunities for individuals who own oak woodland open space to voluntarily conserve the resource values of their land in its current undeveloped state,while still receiving some financial benefit from its value as a developed site. As open space in oak woodland continues to decrease, market-based strategies that allow landowners to recognize the values of their lands while still providing the public values of wildlife habitat, watershed protection,and aesthetic value, need to be looked at more closely.
An excellent book illustrating how market-based strategies can be applied to reduce estate, income, and property taxes is available through the Peninsula Open Space Trust. It is entitled, Preserving California’s Land: Incentives for Peninsula Landowners (see ordering instructions below). This excellent guide points out the importance of advance planning to ensure that open space values are retained. It shows that the need to pay estate taxes doesn’t necessitate the subdivision of land when the owners and their heirs desire that it be maintained as private open space. The book shows how it is possible to 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 are sacrificed, reducing the owner’s flexibility to change their mind about future management direction. This books makes extensive reference to the use of conservation easements and gifts of land as mechanisms to utilize market strategies to conserve open space.
Conservation Easements — These are legal agreements to restrict activities that take place on land. Conservation easements are permanent, and binding on all future owners. The land still belongs to the landowner, 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 the property 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 based on the value of the easement, which is generally the value of the development rights given up. Easement restrictions are negotiated and can be quite flexible. A conservation easement may prohibit construction, but allow management practices such as livestock grazing or selective firewood harvest. Some easements may even allow some cluster development with large blocks maintained for their habitat or open space value.
Land Gift — Another option to encourage open space conservation involves the gift of the land to a land trust or public agency. This requires that there is some important conservation value for the particular property.This strategy decreases the value of an estate, and reduces estate and income taxes. The negative aspect of this strategy is that the land is no longer in private ownership, and will require regular, on-going investments of public funds to support required management activities such as fuel reduction and habitat restoration.
This publication provides an excellent series of case studies to illustrate how conservation easements or gifts of open space can be justified on the basis of estate tax relief and reduction of annual income and property taxes.Shown below is one general example of an oak woodland case study provided in the text, and a series of alternatives illustrating some of the implications of 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
The principles illustrated in this book are quite practical in illustrating the implications of open space conservation strategies on an individual family’s net tax situation. It is quite a useful tool to show how an individual with a large block of ecologically important oak woodland can receive some considerable savings in income taxes through the donation of some part of the development value of the property to a conservation easement. It also shows the importance of careful planning, and how some of the development value can be utilized while retaining a significant part of the open space value of a property. Use of these tools needs to be considered by planners and conservationists interested in ensuring that oak woodland habitat is retained in the face of escalating pressure for development in California.
Preserving California’s Land: Incentives for Peninsula Landowners, by Ann 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 diskette to land trusts who are interested in modifying the material to fit their geographic area, and printing their own educational booklet. Check with the Peninsula Open Space Trust for details.
This information may be out of date
Standiford, Richard B. Quercus – Volume 2, Issue 1 – March, 1995