Conservation easements on farmland: the sale, the deduction and the tax in 2026

What a farm easement is, in tax terms

A conservation easement is a permanent deed restriction: you keep the land, keep farming it and can sell or pass it on, but you and every later owner give up the right to subdivide or develop it. The easement's value is the drop in the farm's value, measured by appraising the property before and after the restriction (Treas. Reg. 1.170A-14(h)(3)). On farm ground near a growing town the drop can be large; on remote cropland it may be small, because there was little development value to give up.

The tax result depends on what you get for those rights. You can sell them to a land trust or a state or county farmland preservation program, donate them to a qualified land trust or government, or do a bargain sale: sell for less than appraised value and donate the difference. The rest of this page follows one farm through each path.

Selling the easement: basis first, then gain

Money received for an easement is treated as a sale of an interest in real property. Under IRS Publication 544 (2025 edition), the amount received is subtracted from the basis of the part of the property the easement affects; if the easement covers the whole farm, or the basis cannot practically be separated, the basis of the whole property is reduced. Only the amount above that basis is taxable gain, and for land held over a year it is long-term.

In our example the easement covers the whole $300,000-basis farm, so the $800,000 price wipes out the basis and leaves $500,000 of gain. That adds $100,865 of tax for this couple, including $15,350 of Pennsylvania tax at its flat 3.07% (Pennsylvania Department of Revenue, 2026) and the 3.8% investment income tax if they rent the farm out (IRC 1411). The land now has zero basis, so a later sale of the restricted farm is all gain. Long-term rates are 0%, 15% or 20%, with 20% above $613,700 of taxable income for joint filers (Rev. Proc. 2025-32, 2026).

Because an easement is an interest in real property for exchange purposes (Treas. Reg. 1.1031(a)-3(a)(5)), the proceeds can go into a 1031 exchange for more land, which is how many farm families grow their acreage with preservation money. Proceeds paid over time can also use the installment method.

Donating the easement: the farmer deduction

A donated easement is a qualified conservation contribution if it is perpetual, given to a qualified organization and serves a conservation purpose such as preserving open space or farmland under a governmental policy (IRC 170(h)). The deduction rules for 2026:

• General limit: 50% of your contribution base (roughly AGI) each year, with the unused amount carried forward up to 15 years (IRC 170(b)(1)(E)(i), (ii)).
• Qualified farmer or rancher: 100% of the contribution base, if more than 50% of your gross income for the year is from the trade or business of farming and the easement keeps the land available for agriculture (IRC 170(b)(1)(E)(iv), (v)).
• New 2026 floor: itemized charitable gifts count only above 0.5% of your contribution base (IRC 170(b)(1)(I), added by P.L. 119-21).
• Paperwork: a qualified appraisal, Form 8283 Section B signed by the land trust, and baseline documentation of the property's condition (Treas. Reg. 1.170A-14(g)(5)).

The qualified farmer test has a trap. In Rutkoske v. Commissioner, 149 T.C. No. 6 (2017), brothers who sold an easement could not count the sale proceeds as farming income, so they failed the more-than-50% test and were held to the 50% limit. A year with a big easement or land sale can knock an active farmer out of the 100% limit.

The bargain sale: how most farm deals close

Public preservation money rarely pays full value. USDA's Agricultural Conservation Easement Program, Agricultural Land Easements (ACEP-ALE) pays an eligible entity up to 50% of the easement's fair market value, or up to 75% for grasslands of special environmental significance, and the entity must match the federal share; the match can include a charitable donation by the landowner (16 U.S.C. 3865b(b)(2), 2026). That is a bargain sale by design.

A bargain sale to a charity splits your basis between the sold and gifted parts in proportion to price over value (Treas. Reg. 1.1011-2(b)). In our example the basis allocated to the easement is 40% of $300,000, or $120,000, matching the 40% value drop. Half is sold, so $60,000 of basis offsets the $400,000 price and $340,000 is gain. The tax on that gain is $65,873, which is $34,992 less than the full sale before counting the deduction. The donated $400,000 is then a charitable deduction against the gain and other income; if the couple qualifies as farmers it can offset up to 100% of their contribution base, with any rest carried forward. See bargain sale to charity.

Legitimate easements vs syndicated deals

Everything above is a family keeping its own farm. A syndicated conservation easement is a different product: investors buy into a partnership that owns rural land, an appraisal claims an inflated development value, and investors receive deductions of four or more times what they paid. The IRS made these listed transactions in Notice 2017-10 and finalized that identification in regulations in 2024 (Treas. Reg. 1.6011-9). SECURE 2.0 (2022) added IRC 170(h)(7), which disallows a partnership or S corporation easement deduction that exceeds 2.5 times the partners' relevant basis, unless the contribution comes at least three years after the entity and its partners acquired their interests.

The tells are easy to spot: you do not own or farm the land, the pitch quotes a deduction ratio, and the deal closes in December. A gross valuation misstatement penalty of 40% applies to overstated easement values (IRC 6662(h)), and a valuation the IRS rejects can cost you the deduction entirely.

How it fits with selling or keeping the farm

Many families use an easement as a partial exit: they convert development value to cash or a deduction now and keep farming. It lowers the farm's value for estate purposes, and IRC 2031(c) can exclude part of the remaining land value from the estate; see special use valuation and the step-up hold. If you plan to sell the whole farm within a few years, the easement usually lowers the price a developer would pay, so model both. The farm sale mechanics are on capital gains tax on farmland. Get the Big Sale Tax Analysis at /analysis/ to compare a full sale, a bargain sale and an outright farm sale side by side.

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