Are Syndicated Conservation Easements Worth the Risk?

Are Syndicated Conservation Easements Worth the Risk?

Conservation Easements are under fire by the IRS and the U.S. Senate Finance Committee (SFC) for being used as unfair tax shelters by the super-wealthy.

A report by the SFC puts this tax avoidance strategy under the spotlight, revealing multiple non-optimal situations that could have severe consequences for investors, including retroactive tax bills.

What is a conservation easement?

A conservation easement is “a voluntary, legal agreement that permanently limits uses of the land in order to protect its conservation values.” Further, a conservation easement is a “legally binding agreement between a landowner and a land trust or government agency where the landowner retains many private property rights.”

Unlike a simple easement which grants no ownership rights, conservation easements do grant some ownership rights, although the land owned cannot be developed.

What are the tax benefits and implications of a conservation easement?

A tax loophole exists for conservation easements that has been promoted heavily to wealthy people, resulting in many of them buying undeveloped land that can then be claimed as a conservation easement. The IRS and Congress are working vigorously to close this loophole.

Currently, owning land that was set aside as a conservation easement allows someone to write off the entire value that a piece of land loses by remaining undeveloped.

It has been the almost-perfect tax shelter for the extremely wealthy, until now. A crackdown by the IRS is causing some firms to stop promoting conservation easements altogether.

Anyone who has their money tied up in conservation easements should be wary. In 2016, the IRS publicly raised a red flag on them, and at least one broker-dealer pulled back from offering these types of tax shelters to their clients.

But the red flag seems to not have deterred investors, with syndicated land deals costing the IRS $9.8 billion in lost revenue for the year 2018, reports The Washington Post. That’s up from $6.8 billion in 2017.

That’s why lawmakers are now trying to get in legislation that completely does away with these write-offs, reducing the total tax-claimable value of the land to just 2.5 times what the landowner paid for the land initially.

Why should conservation easement landowners be worried?

The IRS and the SFC are now aggressively going after these deals, particularly those that were purchased with grossly exaggerated appraisals.

Another point of interest is land purchased in areas that would never be developed anyway.

Promoters of these land deals, particularly in the Southeast of the country, have often been able to get as much as $2 return for every $1 invested into the deal.

For unknown reasons, Georgia is the hotspot for such deals.

The proposed Bill intends not only to reduce tax write-offs for future conservation easements but also to enforce them retroactively all the way back to 2016. If investors have any money in these tax shelters, they should ensure that they have the necessary tax fees set aside for past write-offs.

Are all conservation easements risky?

One of the key findings of the Senate Finance Committee was the over-valuation of land to ensure the largest possible tax breaks.

Unfortunately, conservation easements have gotten a bad name and it is unlikely that anyone will get out of it unscathed. Right now, being in a conservation easement is incredibly risky due to the heat the IRS and the Senate are putting on them.

If the Bill goes through and returns are capped at 2.5 times what the investor paid for the land, other regulations will likely also go through, clamping down further on the ability for the super-wealthy to get such enormous tax breaks in the future.

Tax fraud conviction

In March of 2021, the crackdown on conservation easements took a dramatic turn when two brothers “pleaded guilty to federal tax-fraud conspiracy charges” related to a syndicated conservation easement, reported Bloomberg.

In that particular conservation easement, investors received a $4 charitable donations tax break for every $1 they invested. The problem? The deductions were overvalued, shaving off $250 million from the IRS’s bill. The IRS filed suit, and it was game over.

And that’s not the only lawsuit currently ongoing against Syndicated Conservation Easements, although many are now being brought against the SCEs by investors themselves.

Listed Transactions

According to IRS Notice 2017-10, SCE’s are noted as being “Listed Transactions”—transactions that fall under the IRS’s official list of tax avoidance schemes. Getting involved in any SCE at the moment means opening yourself up to scrutiny by the IRS, and possibly a full tax audit.

If you have been misled by any SCE, or if you feel that SCE promoters have not been transparent with you about your investment, you might want to consider taking action against these promoters.

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