Tax Breaks and Land Preserving: A Complex Equation

The IRS has cracked down on tax breaks for land preservation, citing abusive practices in conservation easements. While some argue that these agreements are ripe for abuse by allowing investors to inflate their tax deductions through speculative property valuations, others claim they still hold value for genuine landowners seeking to preserve their properties while reducing their tax burden.

Conservation easements allow landowners to retain ownership of their property while giving up certain development rights. This can be beneficial for individuals and families owning large tracts of land who want to ensure its preservation for future generations. Florida lawyer Keith Fountain notes that many of his clients are ranching families selling conservation easements to keep their land in the family, using proceeds to pay off debt or buy out younger relatives.

However, syndicated conservation easement deals have raised concerns. In these cases, groups of investors band together to purchase stakes in land and donate the easement. Promoters often inflate the valuation of development rights, allowing investors to claim tax deductions exceeding their actual investment. The IRS has scrutinized these deals, with one recent example seeing a $41.6 million deduction slashed to just $800,000.

Despite the abuse of syndicated deals, some lawyers argue that conservation easements can still be used as a legitimate tax strategy for individual landowners if done properly. They advise clients on the importance of documenting their easements with clear photos and descriptions, particularly in light of the IRS’s focus on valuations.

The Tax Court has centered on determining the actual value of foregone development rights, removing uncertainty for land trusts and landowners. This shift has led some lawyers to emphasize the need for proper guidance and execution when it comes to conservation easements.

A Tax Break with Strings Attached

Conservation easements come with their own set of rules and regulations that can be complex and daunting for those unfamiliar with them. Associate director for conservation defense at the Land Trust Alliance, Diana Norris, notes that earlier cases often turned on technical defects in deed or donation paperwork. This has led to a focus on valuations, removing some uncertainty for land trusts and landowners.

However, this newfound clarity also highlights the importance of proper guidance and execution when it comes to conservation easements. Lawyer Steve Small points out that clients with unrealistically high expectations about their tax deductions are often the result of promoter-driven syndicated deals. These agreements can be lucrative for investors but come with significant risks for landowners.

The Risks and Rewards

While some argue that conservation easements are a legitimate way to reduce one’s tax burden, others claim they are fraught with risk. Former IRS national fraud counsel Carolyn Schenck notes that the fact that some taxpayers abuse the rules does not necessarily mean that the underlying policy lacks value.

However, the use of conservation easements also raises questions about their impact on surrounding properties and the community at large. For instance, easements can enhance the value of nearby land by preserving scenic views and privacy. If the easement benefits nearby property owned by the landowner or a relative, the additional value must be subtracted from the deduction.

The Future of Tax Breaks for Land Preservation

As the IRS continues to scrutinize syndicated conservation easement deals, it remains unclear whether conservation easements will continue to hold value as a legitimate tax strategy. While some lawyers refuse to advise on these agreements due to the risk of audit, others argue that with proper guidance and execution, they can provide significant benefits for those genuinely interested in preserving their properties.

Ultimately, the use of tax breaks for land preservation raises complex questions about public policy goals and individual interests. The stakes are high, and the outcome will have far-reaching implications for landowners, investors, and policymakers alike.