If North Carolina passes a state law requiring landowners to maintain riparian buffers along streams, can a landowner who donates a conservation easement over that already-mandated buffer still claim the state conservation tax credit?
Plain-English summary
Bill Flournoy at the Department of Environment, Health, and Natural Resources asked whether a landowner could claim North Carolina's conservation tax credit (25% of fair market value of a donated conservation easement) when the underlying parcel was already subject to a proposed mandatory state riparian-buffer rule.
The question had two parts: (1) is the landowner eligible for the credit at all, and (2) if so, what is the credit worth given that the land was already required by law to stay in its natural state?
Senior Deputy AG Daniel Oakley, Assistant AGs T.D. Nifong, and Jill Hickey answered: probably yes on eligibility, probably negligible on value, and the legislature should clarify if it wants a meaningful credit.
The five statutory eligibility tests. §§ 105-130.34 and 105-151.12 (the corporate and individual versions of the conservation credit, respectively) require:
- A "donation" (gift) of an interest in real property
- The property must be located in North Carolina
- The donation must go to the State, a local government, or a qualified conservation nonprofit
- The donated interest must be useful for a public conservation purpose (beach access, water access, fish and wildlife conservation, or similar)
- The land must not be required by local regulation to be dedicated, nor dedicated to permit increased building density on adjacent lands
Walking through each test for a mandatory-buffer parcel.
Donation. The "donation" requirement is satisfied even with a state law restricting use. The state rule limits how the landowner can use the land; it does not require the gift of any interest. The landowner still chooses to convey the easement.
NC real property interest. Satisfied. A conservation easement is an interest in land under § 121-38(b).
Qualified recipient. Satisfied if the donee is the State, a local government, or a qualified land trust.
Public conservation purpose. The opinion notes the buffer easement would likely not provide public access. Wildlife conservation value depends on corridor width and habitat connectivity. But the riparian buffer provides public conservation benefits as a sediment trap and non-point-source pollution filter, and would also provide scenic and aesthetic benefits aligned with the Natural and Scenic Rivers Act (§ 113A-30 et seq.). Those public conservation-related benefits should satisfy the criterion.
The exclusion clause. The statute disqualifies easements over lands "required to be dedicated pursuant to local governmental regulation or ordinance" or used to obtain density bonuses on adjacent land. The opinion reads this language narrowly. It bars credits where local law forces the dedication. It does not address state-imposed mandates.
The statutory ambiguity. The opinion acknowledges that two readings of the exclusion clause are possible: (a) the legislature deliberately distinguished between state-required and local-required dedications, so state-mandated buffers do not disqualify the credit; (b) the legislature simply did not anticipate state-mandated buffers (because none existed at the time the credit was enacted) and the exclusion would extend to state mandates if a court read it expansively.
The opinion adopts the first reading (the credit is available) but flags that a court could go the other way. It recommends legislative clarification.
The valuation problem. Even if the credit applies, the practical value of donating a conservation easement over land already restricted by mandatory buffer rules is likely to be very small. The land's "fair market value" under the easement-encumbered state is depressed because the rule already prevents productive use. The donor's credit is 25% of the easement's fair market value; if the easement is worth little, the credit is worth less. The opinion notes that the General Statutes do not mandate any particular appraisal methodology for these donations, so the calculation is "subject to scrutiny by the Department of Revenue."
Two recommendations to the legislature. First, if the General Assembly wants donors of mandatory-buffer easements to remain eligible for the credit, it should say so explicitly. Second, if the legislature wants the credit to retain real value despite the buffer mandate, it should also clarify the appraisal methodology so the buffer requirement does not destroy the easement's measured value.
Currency note
This opinion was issued in 1996. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. North Carolina's conservation tax credit has been amended, capped, and at one point repealed entirely (effective 2013). Federal conservation easement tax law has also evolved substantially. Any landowner considering a buffer-area easement donation should consult a tax attorney familiar with current state credit availability (if any), current federal income tax treatment under IRC § 170(h), and current appraisal standards.
Background and statutory framework
North Carolina enacted §§ 105-130.34 and 105-151.12 to encourage donations of land and conservation easements for public benefit. The 25% state credit was generous and was paired with the federal income tax deduction under IRC § 170(h), making conservation easements particularly attractive for landowners with appreciated land and significant tax bills.
The mid-1990s also saw growing concern about non-point-source water pollution, particularly from agricultural runoff into the Neuse and Tar-Pamlico river basins. The state was considering mandatory riparian buffer rules through the Environmental Management Commission (these eventually became the Neuse Riparian Buffer Rule, 15A NCAC 2B .0233, and the Tar-Pamlico Buffer Rule). The opinion sits at the intersection of two state policy goals: water quality protection through mandatory buffers and voluntary conservation through tax credits.
The exclusion clause in the conservation credit statutes was clearly drafted to address a specific concern: landowners using "donations" of land that local zoning or subdivision regulations forced them to set aside, or that they used to obtain density bonuses (transferable development rights), to capture tax credits without true donative intent. The drafters were thinking about local zoning, not statewide environmental mandates. The opinion's narrow reading of the exclusion is consistent with this purpose, but the textual ambiguity gave the AG a path either way.
The valuation problem the opinion flags is genuine and recurring in conservation easement tax law. The "fair market value" of an easement is normally calculated as the before-easement land value minus the after-easement land value (the "before-and-after" method). For a buffer parcel already legally restricted, the before-easement value is already depressed, so the easement's marginal restriction adds little additional value reduction. The credit's amount tracks that small marginal value. The legislature could specify a different methodology that ignored the buffer mandate for credit purposes, but that would require a statutory amendment.
Common questions
What if the state buffer rule had not yet been adopted when the easement was donated?
The opinion implicitly addresses this. If the easement predates the buffer rule, the easement is donated against the pre-rule land value (higher), and the credit is correspondingly larger. The exclusion clause does not reach that case at all, since the mandate did not exist at donation. Landowners considering an easement might rush to donate before the buffer rule took effect, to lock in the higher valuation.
What if the easement covers more than the buffer area?
If the easement reaches uplands beyond the mandated buffer, the credit attaches to the marginal restriction of the additional acreage. The portion within the buffer would generate little credit; the additional area might generate substantial credit. Donors with parcels larger than the buffer width would have significant credit available for the upland portion.
Does this opinion address federal income tax deductions under IRC § 170(h)?
No. The opinion is purely state-law. Federal deductibility under IRC § 170(h) has its own framework (conservation purpose tests, exclusivity, perpetuity, qualified appraisals). The donor's federal benefit might be substantial even if the state credit is small.
What if the local government, rather than the state, imposes the buffer?
That would trigger the exclusion clause directly. The statute bars the credit for lands "required to be dedicated pursuant to local governmental regulation or ordinance." A municipal stream-buffer ordinance would disqualify a donor; a state EMC rule, under the opinion's reading, would not.
Could a court reject the AG's narrow reading of the exclusion?
Yes. A court could read the exclusion to cover any government-mandated dedication and rule that the absence of state mandates at the time of enactment was incidental. The opinion expressly identifies this as a possible alternative reading. Litigants in any Department of Revenue dispute would need to brief the question.
Was the General Assembly's response to this opinion ever recorded?
The opinion does not say. Subsequent legislation regarding the conservation credit has changed the credit's structure, cap, and ultimate availability multiple times. Whether any of those amendments addressed the buffer interaction specifically would need to be researched in session-law history.
Source
Citations
- N.C. Gen. Stat. § 105-130.34
- N.C. Gen. Stat. § 105-151.12
- N.C. Gen. Stat. § 121-38
- N.C. Gen. Stat. § 113A-30
- N.C. Gen. Stat. § 113A-100
Original opinion text
March 20, 1996
Mr. Bill Flournoy
Legislative & Intergovernmental Affairs
N.C. Department of Environment, Health, and Natural Resources
Post Office Box 27687
Raleigh, North Carolina 27611-7687
Re: Advisory Opinion: Availability of North Carolina Conservation Tax Credits Under G.S. §§ 105-130.34 & 105-151.12 for Donations of Mandatory Riparian Buffer Lands
Dear Mr. Flournoy:
You have asked this Office about the applicability of the North Carolina "conservation tax credits", available under N.C.G.S. §§ 105-130.34 and 105-151.12, to donations of conservation easements for riparian lands required by proposed state law to be maintained as stream buffers in order to protect stream water quality. Specifically, you have raised two questions: (1) would a landowner be eligible for a state conservation tax credit for donation of a conservation easement in a parcel of land required by law to be maintained in its natural state as a stream buffer area; and (2) if so, to what extent would the buffer requirement affect the value of the tax credit available to the donor. We should state at the outset that there is no North Carolina case law interpreting G.S. §§ 105-130.34 and 105-151.12. Therefore, determining the answers to the questions you pose largely becomes a matter of statutory interpretation.
The North Carolina conservation tax credit statutes provide, in pertinent part, that
"[a] person who makes a qualified donation of interests in real property located in North Carolina during the taxable year that is useful for (i) public beach access or use, (ii) public access to public waters or trails, (iii) fish and wildlife conservation, or (iv) other similar land conservation purposes, shall be allowed a credit against the tax imposed by this Division an amount equal to twenty-five percent (25%) of the fair market value of the donated property interest. To be eligible for this credit, the interest in real property must be donated to and accepted by either the State, a local government or a body that is both organized to receive and administer lands for conservation purposes and is qualified to receive charitable contributions under the Code; provided, however, that lands required to be dedicated pursuant to local governmental regulation or ordinance and dedications made to increase building density levels permitted under such regulations or ordinances shall not be eligible for this credit…." N.C.G.S. § 105-151.12.
Basically, then, a person (or corporation) must meet five requirements under North Carolina law to qualify for a conservation tax credit: (1) there must be a gift, i.e., a "donation"; of (2) a North Carolina real property interest; (3) to a governmental agency or non-profit entity organized to receive and hold conservation donations; (4) the donated property interest must be useful for a public land conservation purpose; and (5) local regulations must neither require the land involved to be dedicated for conservation nor allow it to be so dedicated to permit increased building densities on adjacent lands. Each of those requirements is discussed below, in turn.
The "donation" requirement of the conservation tax statutes means simply that the taxpayer must freely give the conservation easement or other interest in real property. In our opinion, this requirement is satisfied despite the existence of a state law or rule requiring mandatory stream buffers. The state rule would presumably simply restrict the landowner's use of the lands within the buffer; it would not require the gift of any interest in those lands.
The second requirement that must be met to qualify for a conservation tax credit, that the gift must be an interest in real property in North Carolina, is satisfied under the scenario you present. A conservation easement is an interest in land. N.C.G.S. § 121-38(b).
In addition, the conservation tax credit statutes require that the relevant donation of a real property interest be made either to "the State, a local government or a body that is both organized to receive and administer lands for conservation purposes and is qualified to receive charitable contributions under the [state tax] Code …" N.C.G.S. § 151.12(a); Accord, N.C.G.S. § 105-130.34(a). Again, there is no apparent issue as to this provision in the situation you present, where riparian conservation easements would be donated to either a governmental agency, or a land trust or other appropriate non-profit, conservation organization.
The tax credit statutes also require that the donated property interest be "useful for (i) public beach access or use, (ii) public access to public waters or trails, (iii) fish and wildlife conservation, or (iv) other similar land conservation purposes …" N.C.G.S. § 151.12(a); Accord, N.C.G.S. § 105-130.34(a). The gift of a conservation easement in riparian lands would likely have no value for public access or use. Whether it would have wildlife value would depend both on the width of the corridor donated, and on its location in relation to and in connection with other suitable wildlife habitat areas. Based upon the current proposals to impose mandatory riparian buffers as a water quality protection measure, there would likely be significant conservation value to fisheries from the water quality benefits derived from the maintenance of even a narrow strip of riparian buffer lands (e.g., its function as a trap to sediment runoff and non-point source pollutants). Moreover, preservation of natural, riparian corridors would also provide the sort of public, scenic and aesthetic benefits sought to be promoted by the North Carolina Natural and Scenic Rivers Act. See N.C.G.S. §§ 113A-30 et seq. Because of those public, conservation-related benefits, it is our opinion that the donation of a conservation easement in riparian lands will generally meet the "public land conservation use" criterion of the conservation tax credit statutes.
Finally, the conservation tax credit statutes provide that in order for a property interest donation to qualify for a conservation tax credit, local governmental regulations must not require the land in which the property interest is donated to be dedicated for conservation purposes nor allow it to be so dedicated to permit increased building densities on adjacent property. This particular provision may lead to different results, depending on the method chosen for imposing mandatory buffers. For example, one method of achieving a mandatory riparian buffer zone to protect water quality would be for the General Assembly to enact a law similar to the Coastal Area Management Act ("CAMA"), N.C.G.S. §§ 113A-100 et seq., setting out state guidelines for riparian land use that must be reflected in and incorporated into local land use plans. Under the express wording of the tax statutes, if that regulatory route is chosen and local governments impose a mandatory buffer requirement, any landowner who donates a conservation easement in the lands required to be dedicated to conservation use to protect water quality would not be eligible to receive a tax credit for the donation. On the other hand, if a state agency such as the Environmental Management Commission, adopts rules which require mandatory riparian buffers as a statewide measure, there would be no local governmental regulation.
Sections 105-151.12 and 105-130.34 do not directly speak to the case where a conservation easement is donated in lands required by a state law or rule, rather than local ordinance, to be maintained as a riparian buffer zone. Given that omission, it is certainly possible to read that language as intentionally distinguishing between those instances where conservation dedication or a mandatory riparian buffer is required by state, as opposed to local, law. That, we believe, is the correct interpretation. Such an interpretation, however, would potentially discriminate against landowners in the various affected counties. For example, given legislative enactment of a CAMA-type land use scheme as suggested above, donors in those counties where the local government imposed the buffer requirement would not be eligible for a tax credit, while donors in counties where the State imposed the buffer requirement upon failure of the county to do so would be eligible for the credit. It is possible, we believe, that a court could find that this language was simply intended to reflect the state of North Carolina land use law at the time the conservation tax credit statutes were enacted (no state laws requiring maintenance of private lands in their natural state, but such regulatory powers vested in local governments to achieve local land use objectives), rather than to be limiting in nature, and rule that the tax credit was not available where a state rule required mandatory riparian buffers.
Based on the above analysis, it is our conclusion that where state law or rule requires a landowner to maintain a riparian buffer corridor to protect state water quality, donation of a conservation easement in that "protected" area would qualify its owner for a conservation tax credit under North Carolina law. However, as noted above, the statute does not unambiguously express this conclusion. The remaining question, what the value of that tax credit might be in light of the buffer requirement, is discussed below.
We note at the outset that the General Statutes do not mandate any particular methodology for appraisals in this area, and the value of the tax credit for donation of a conservation easement may or may not be influenced by the existence of a state law or rule restricting the use of the land, such as a mandatory buffer requirement. Under G.S. §§ 105-151.12 and 105-130.34, the donor of the conservation easement may claim 25% of the fair market value of the easement as a tax credit. In practical terms, the fair market value of a conservation easement granted on the same parcel of land that was subject to a mandatory riparian buffer requirement may be worth very little, and the tax credit of 25% of that fair market value would be worth even less.
In summary, it is our opinion that if the State were to require landowners to maintain specific riparian lands as a water quality buffer, the landowner's donation to the State (or a local government or land trust organization) of a conservation easement in those affected lands would qualify for a conservation tax credit under state law. However, the value of that donation, and thus the tax credit that may be claimed for it, would likely be negligible and is a determination that would be subject to scrutiny by the Department of Revenue.
Based on the foregoing analysis, it is our recommendation that if the General Assembly wishes to insure that property owners who donate a conservation easement on lands subject to a state rule requiring mandatory riparian buffers remain eligible for a state tax credit, it should so specify in the statute. In addition, any legislative considerations related to requiring mandatory riparian buffers should also include a recognition of the tax credit valuation issue as discussed above, and the General Assembly should be requested to clarify the appraisal methodology such that the imposition of the buffer requirement would have no effect on the value of the property donated for conservation easement purposes.
We hope this is responsive to your questions. Please contact Jill Hickey or Tim Nifong if you have any additional questions or feel that clarification is necessary.
Daniel C. Oakley
Senior Deputy Attorney General
T. D. Nifong
Assistant Attorney General
Jill B. Hickey
Assistant Attorney General