Billings Gazette: Conservation easement preserve family's way of life

The easement hasn't interfered with the ranch operation. A grazing management plan was adopted to benefit wildlife habitat, but it was nothing he objected to.

"The most significant aspect is that this will be maintained as a livestock operation," he said.

Beyond protection of a family way of life, the easement had the advantage of reducing the value of the ranch. That, in turn, will reduce inheritance tax liability.

As the price of land continues to rise, the reduction in value can become important to multigeneration operations. It can mean the difference between selling the farm to pay the taxes and keeping it in the family for generations to come.

Landowners who donate easements can also receive hefty federal income-tax deductions, said his daughter, Mary Page, who runs the Montana Land Reliance's Eastern Montana office in Billings. State taxes won't change, however. Under Montana law, conservation easements do not affect values for property tax purposes.

But federal law considers the decreased value of the land as a charitable contribution for tax purposes. Under the law, donors can deduct an amount up to 30 percent of adjusted gross income and spread it over six years.

Legislation that would make land easement donations more attractive by allowing donors to extend use of the deduction to up to 16 years has been passed in the U.S. Senate. It also increases the amount that farmers and ranchers can offset up to 100 percent of adjusted gross income. The House version of the tax legislation, however, does not contain these provisions. A conference committee of House and Senate lawmakers will try to forge a compromise starting this week.

If the tax breaks are increased, Mary Page said, "a lot of people have said they will place conservation easements on their property."

How much the deduction is worth depends on how much the easement shaves off the value of the land.

To be eligible for the deduction, a qualified independent appraiser must establish a pre-easement fair market value for the property. Then the appraiser does a second evaluation based on what the land is worth with the attached easement. The difference between the two appraisals constitutes the charitable contribution.

Most of the time, the easement knocks off between 20 and 30 percent of the market value, said David Dietrich, a Billings attorney specializing in agricultural real estate law. But market value can be more seriously affected on properties with high development potential. An easement on a property with subdivision possibilities could mean an 80 percent reduction in market value, he said.

"We don't see a lot of 70 or 80 percent takedowns, but they're out there," he said.

Until recently, most of the interest in easements as an estate planning tool came from Western Montana, where land prices have soared on the basis of what people are willing to pay for recreational and amenity values. Inheritance taxes are based on those inflated values, not on the value of the ranch as an agricultural property. Cash poor, land rich families face selling all or part of the land to pay the taxes.

"In the 1980s and 1990s, what we were seeing was really high land prices in the Flathead and Bitterroot," Dietrich said. "It's starting to move into the Gallatin. It's moving east into the Yellowstone. We're seeing that it's no longer agricultural values in a lot of places. It's recreation value. In the Musselshell, all you have to do is add elk."

Jim Taylor, a managing director at Hall and Hall in Billings, one of the West's largest farm-ranch realty and management companies, said there is always a recreational component in land sales, but in Eastern Montana, buyers are still more interested in operating values.

The hottest properties are those in reasonable proximity to towns and airports, he said. Rivers or live waters, diverse terrain and areas where elk and waterfowl are plentiful draw a lot of interest, and they tend to be scattered around, Taylor said.

"The remote ranches are probably not as desirable," he noted. "But there are so many factors that come into values."

A lot of property in Eastern Montana has been on the market during the last 10 to 12 years, said Mark Norem, a Big Timber real estate agent and land manager with clients all over the West. Much of the land has been purchased by neighbors expanding their operations. To make a living in agriculture, ranches and farms have to keep getting bigger, he said.

But competing buyers from outside the community may undermine some expansion plans.

"Land is getting pretty expensive for neighbors to buy," Taylor said.