Do you ever wish you could just wave your hand and erase your tax obligations? While that will never be possible, there is a way to erase some of your tax obligations. Many high-net-worth investors have been able to save significantly on their taxes through conservation easements.
What Are Conservation Easements?
A conservation easement is a legal agreement that permanently limits the use of designated land for conservation purposes. The conservation purposes can be any one of the following:
- Protection of natural habitat of fish, wildlife, plants, or ecosystem
- Preservation of land areas for outdoor recreation or education of the public
- Protection of historically important land or historical structures
- Preservation of open space
Conservation easements can be owned by private landowners, but they are usually managed by 501(c)(3) conservation organizations or government entities.
What Do Conservation Easements Have To Do With Taxes?
While you may appreciate helping out the wildlife, you’re probably wondering what conservation easements have to do with investors like you and their taxes. Conservation easements are valuable to investors when created through tax-deductible donations.
You see, if you own land, you can donate a portion of it to be used as a conservation easement and it counts as a charitable deduction. The charitable deduction can be used to offset up to 30% of your income (50% if Congress continues to extend it). This non-cash contribution is not subject to alternative minimum tax (AMT) and can be carried forward up to 15 years.
What Benefits Do Conservation Easements Offer Investors?
The reason that conservation easements are so appealing is that investors can often deduct far more than they put into the easement. The way the deduction is calculated is that an appraisal is done, valued based on the highest and best use of the land. Then the land is appraised for its value with the conservation easement in place, since it is a permanent arrangement that would affect all future owners. The difference between the two appraisals is the charitable contribution amount.
President Donald Trump has brought a lot of attention to conservation easements because of the way he has used them. He created a conservation easement on his Mar-a-Lago estate in 1993. The property was appraised for $25 million before the encumbrance and $19.25 million after it was put in place. The difference of $5.75 million he got to take as a tax deduction. And he still owns the property; he has simply placed limits on some of its use. (1)
Who Can Invest In Conservation Easements?
Conservation easements are not for everyone. The ideal participant would earn more than $500,000, though accredited investors are eligible. You don’t have to be a landowner to take advantage of conservation easements, though. Syndicated conservation easements allow investors to partner with landowners to take tax deductions well above the money that they invest.
What Are The Risks Associated With Conservation Easements?
Although a great tax planning tool, conservation easements can be dangerous if not handled properly. The IRS has a 68-page audit guide for conservation easements. They can become a nightmare if not structured according to IRS regulations and handled with care. As such, it is important to work with experienced professionals when taking advantage of these complex transactions.
If this information on conservation easements has piqued your interest, we would love to continue the discussion with you. Contact us at (626) 529-8347 or email Ricky directly at firstname.lastname@example.org for a free consultation. If it turns out that a conservation easement is a good option for you, we can guide you through the entire process.
About Haydel, Biel & Associates
Haydel, Biel & Associates is an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at email@example.com.
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