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Conservation easements remain a source of unease in the tax world. They were designed as a tax benefit to encourage the preservation of natural resources, but they’ve also become a popular tax avoidance vehicle. The IRS has stepped in with some guardrails to prevent abuse of the tax benefit, but they might not be strong enough.
If you own real property with an “easement,” another person or entity has the right to access it. If you donate some of that land to an entity through a conservation easement, you promise to conserve, or not develop, the donated land.
In return for the donation, you get a federal income tax break. Taxpayers can deduct the difference in their donated property’s appraised value before and after their donation. Conservation easements have so far conserved over 27.7 million acres of land in the US.
Tax-wise, conservation easements have been around for decades, guided by federal and state laws concerning taxation, real estate, contracts, and charitable organizations. In 1964, the IRS first authorized a federal charitable income tax deduction for the donation of a conservation easement to the US for land adjacent to federal highways. By 1980, Congress made conservation easement deductions for donations to government agencies and charitable organizations a permanent part of the Internal Revenue Code.
Who benefits most from those tax breaks?
TPC’s Adam Looney is among those who have argued that the tax break costs far too much in revenue compared to the environmental benefits it creates. Looney also noted that the tax breaks can be used for easements on donated land with lower conservation value.
“When private charities and federal and state elected officials allocate spending to purchase or conserve land, they do not spend the vast majority of their resources to preserve golf courses, suburban subdivisions, real estate developments, or vacation homes,” Looney wrote. But those kinds of properties remain eligible for donation.
Looney’s 2017 analysis reveals another confounding policy challenge presented by conservation easements. For example, data from 2010-12 showed that 36 percent of all conservation easement deductions were taken by taxpayers in Georgia. But Georgia is home to only 1.5 percent of conserved land, per the Land Trust Alliance. Looney also calculated that 25 organizations (out of about 1,700 land trusts in the US) “received about half of all donations of easements, measured in dollar value.”
Recent crackdowns on the use of conservation easements have focused on the aggressive use of syndicated conservation easements, where real estate developers can inflate land values to attract oversized tax breaks. After a 2020 bipartisan investigation by the Senate Finance Committee found the tax break has been abused by certain partnerships and pass-through entities, the SECURE 2.0 Act of 2022 gave the executive branch more authority to crack down on these maneuvers. Last November, Treasury and the IRS proposed regulations that disallow deductions for certain overvalued syndicated conservation easements held by those types of firms.
But the uneasy nature of conservation easements resurfaced last month. Two promoters of syndicated conservation easements received stiff prison sentences for facilitating tax evasion. And The Wall Street Journal reported on a very large donated conservation easement in Florida (development rights to the 300-acre Blue Monster golf course at Trump National Doral Golf Club, donated by Republican presidential candidate and former President Donald Trump in 2022 to the City of Doral).
We all have an interest in preserving natural habitats and scenery. While taxpayers and lawmakers alike might be comfortable with the revenue losses that come from donated conservation easement deductions, Congress might consider reviewing the design of the tax break. Our tax code is a handy policymaking tool, and it too still needs protection from overuse or abuse.
The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.
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