Legal Insight. Business Instinct.

Parsing Out a Bundle of Sticks

Owning real property is like owning a bundle of sticks. Each stick represents an individual right. One or more sticks may be given away or transferred to another.

For example, a stick may be given to the County for a roadway. Another stick may be given to the power company for electric transmission lines. A neighbor may have an easement for a utility line, airplanes have the right to fly overhead through airspace, and the bank may have a mortgage on the property. These are all examples of rights in property that are held by someone other than the owner of legal title to the property.

Many farmers and ranchers have chosen to give their development rights to a land trust. Those development rights are simply sticks in the bundle of land ownership.

Those development rights have value, and are typically called a “conservation easement.” By giving away development rights a farmer or rancher preserves his or her farm from future development, reduces its value so as to avoid estate taxes, and earns an immediate valuable tax credit.

For example, Farmer Jones who earns 50% or more of his income from farming or ranching is entitled to deduct 100% of a conservation easement from his Adjusted Gross Income. A conservation easement on a 150 acre farm valued at $5,000 per acre results in a $750,000 tax credit. Any unused portion carries forward for 15 years. If Farmer Jones makes $50,000 per year from his farming, he will owe no taxes for the next fifteen years after granting a conservation easement.

Farmer Jones will be able to continue to farms his ground, reduce or eliminate income taxes, and because of the reduced value of his property, preserve his farm property for the next generation.

All because of a bundle of sticks.

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