While conservation easements have for years been a sensitive topic with the IRS, they remain a tax-efficient tool for those interested in both environmental conservation and deductions when properly administered. As clients consider taxes in advance of year end, conservation charities may become useful tools.
In 2019 two clients each had a question. One of them was considering his CPA’s recommendation to invest in a quarry development, and the other was looking at options for 20 acres around his house.
Both of them were considering conservation easements to save literally millions of dollars in taxes. Typically, in these circumstances, the owner of land or property donates it to a conservation charity, and takes a benefit against the opportunity cost of developing the land. “Developing” can mean building apartments, tract housing, and even quarrying the land. In the particular case of Donald Trump, the former president has on multiple occasions purchased a large home, and donated the “use of” the surrounding land to conservation. Trump argues that grounds around the home could be developed into apartments or tract housing. In this way, Trump established that an upstate NY home he purchased for $7.5 million was potentially worth $56 million. Hence, he effectively benefitted by $21 million for purchasing the home (the IRS is still investigating). You may also have correctly guessed that Mar-a-Lago was subject to this same process.
Pursuing aggressive appraisals of purchased property is a route to audit, investigations, courtrooms and penalties, but bonafide transactions with justifiable appraisals are common, legal and at least one client regularly uses them to the delight of local environmental organizations. In addition, many who are passionate for environmental conservation and the outdoors continue to donate their property for the enjoyment of wildlife, hunters, anglers, and outdoor enthusiasts.
Some more detail on the two types of easements we commonly see:
“Traditional” or direct conservation easements: A property owner donates the right to use his own property to an approved land trust or conservation association. Most commonly, this applies to unoccupied land tracts on the edge of populated areas. The property henceforth may never be developed under certain specifications. The owner receives a deduction against that lost “value”.
Syndicated conservation easements: A developer typically raises funds for the purpose of developing a property for construction, quarrying or other such use. He raises funds from third parties to cover the purchase of the property, plus extensive professional fees. Despite these fees, the deduction value of the easement may be 2-4x the investment by third party investors.
So what about those original clients?
Like almost every transaction reducing Adjustable Gross Income, each transaction required significant fees and legwork, and only one client decided to move forward. Ultimately, however, it’s likely that both end up donating land. This, and our nations ever growing need for tax revenue, are why these easements may not be an option for tax sensitive property owners five or ten years from today. But for today, and after properly considering the cost/benefit analysis of conservation easements, clients still find it a useful tool in the tax-efficiency toolbox.