Rancher Keith Unger learned the hard way not to be overly optimistic about the tax benefits of agricultural easements.
In 2007, Unger’s family allowed the U.S. Forest Service to place an agricultural easement on its ranchland in Hawaii.
The family agreed to forgo developing the valuable property, but the easement allowed them to continue grazing and logging activities.
By entering into the deal, the family decreased the property’s value from about $8.5 million to $3 million, Unger said.
In their case, that outcome was desirable because they want to continue farming while reducing the eventual estate tax burden, he said.
“We had to figure out a way to devalue it,” Unger said.
While the value of the easement was appraised at $5.5 million, the family accepted a payment of just $2.2 million from the Forest Service, Unger said.
The balance — $3.3 million — was considered a donation, which the family then deducted from its taxable income, he said.
Three years after the easement was sold, however, the U.S. Internal Revenue Service had a surprise.
The agency disagreed with the appraisal and found that the family wasn’t entitled to write off the $3.3 million donation, Unger said.
“We were shocked by their interpretation,” he said.
Rather than spend vast amounts of money fighting the IRS in tax court, the family opted to settle with the agency.
They were allowed to write off 38 percent of the $3.3 million donation, Unger said.
If he could do it over again, Unger said he would have tried to sell the balance of the easement’s value to a land trust or similar organization.
He also said the IRS should have a seat at the table during easement negotiations to prevent such problems.
Unger’s case serves as a prime lesson for growers entering into ag easements — tread carefully, according to experts at the recent Ag Summit in Wilsonville, Ore.
“Current and future owners are going to be bound by the terms of the easement,” said Laysan Unger, an attorney with the Dunn Carney law firm and Keith Unger’s daughter.
The upside of ag easements is that they can be customized to meet the needs of farm families, she said.
The agreements don’t have to turn the land into wilderness.
“These transactions can be tailored to allow for productive ag use,” she said.
By selling an easement, farmers can free up cash to use on equipment or even more land, said Rick McMonagle, land conservation manager for the East Multnomah Soil and Water Conservation District.
Conflicts between the buyers and sellers of easements are uncommon, he said.
Problems are more likely to arise between landowners who bought property subject to an easement and didn’t understand the limitations, McMonagle said.
Even in Oregon, which has strong protections for farmland, easements are a useful tool because they offer permanent conservation that’s not subject to zoning and regulatory changes, he said.