On December 23, 2016 the IRS quietly issued a notice that may have left some taxpayers counting on a charitable deduction in a pickle. The IRS deemed syndicated conservation easement transactions as a “listed transaction”. Which doesn’t sound so bad but a “listed transaction” is essentially IRS terminology for tax avoidance strategy.
What is a Conservation Easement?
At a very high level, the basic mechanics of the strategy starts when a landowner voluntarily places restrictions on the land (or a portion of the land) and then donates that right to a qualified organization. The idea is to conserve the land, typically from development, while the landowner can continue to own and use the property. In exchange for contributing to the greater good, the landowner is allowed a significant income tax deduction. The catch is the easement stays with the property in perpetuity. So if the property is ever sold this could reduce the sale price. Conservation easements have been around since the late 1880’s and can provide significant tax benefits.
Syndicated Conservation Easement
Some promoters have been marketing syndicated conservation easements and promising charitable deductions larger than the amount invested. How it works, the taxpayer invests money into a pass-through entity. In return the taxpayer receives an ownership interest in the pass-through entity. The entity either already owns or acquires real property. The promoter then obtains an inflated appraisal of the property and the entity donates a conservation easement to a qualified organization. Since the taxpayer owns a portion of the entity the charitable deduction passes through to the investor. For example if a taxpayer invested $100,000 into the entity they may be promised a $200,000 tax deduction.
The IRS Crackdown
The IRS intends to challenge the tax benefits received from these transactions. Taxpayers that have entered into these transactions on or after January 1, 2010 (if under the statute of limitations) must disclose these transactions. Penalties are involved if the taxpayer fails to disclose.
Legitimate qualified conservation easements remain a powerful strategy. However, taxpayers should shy away from tax strategies that seem too good to be true. Caveat emptor.