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A CREDO TAX PLANNING STRATEGY SOLUTION

Strategic Tax Planning with CONSERVATION EASEMENTS: Maximizing Benefits and Ensuring Compliance

This whitepaper provides an in-depth analysis of conservation easements, outlining their fundamental aspects, associated costs, and potential benefits. It delves into the integration of these easements into effective tax planning strategies. However, it emphasizes the importance of diligence and recommends consulting with seasoned tax advisors, such as Credo CFOs & CPAs. These professionals stay abreast of legislative changes and the nuances of the easement program, ensuring that investors not only capitalize on the available tax advantages of easement donations but also remain fully compliant with legal requirements.

Investing in conservation land offers substantial tax benefits, appealing to savvy high-net-worth individuals. Despite the restrictions associated with conservation properties, the financial rewards are significant, providing an opportunity to acquire land or real estate at a reduced cost. However, investors must be prepared to comply fully with the specific terms of their conservation easement agreements.

WHAT IS A CONSERVATION EASEMENT?

A conservation easement is a binding legal contract designed to permanently limit the use of designated land for various conservation objectives. These objectives may include the:

  • Protection of natural habitats for wildlife, fish, and plants
  • Preservation of lands for public recreation and education
  • Safeguarding historically significant sites or structures, and maintaining open spaces

Such agreements authorize either government agencies or local land trusts to oversee the land management. While private landowners can hold conservation easements, they are typically administered by 501(c)(3) conservation organizations or governmental entities. Due to the permanent nature of these easements, both landowners who donate land for conservation purposes and investors buying easement-protected land are eligible for certain tax benefits.

BENEFITS OF BUYING A LAND OR PROPERTY WITH A CONSERVATION EASEMENT

Smart Way to Buy a Property or Land on the Cheap

Purchasing conservation land or property requires compliance with the stipulated terms of the easement. While these terms impose certain restrictions, the investment in such properties can lead to significant financial savings. This approach presents a lucrative investment opportunity and a strategic method for acquiring land or real estate at a lower cost, particularly for those prepared to navigate the constraints of the easement.

Major Tax Savings

The allure of investing in conservation easements lies in the potential for substantial tax deductions, often exceeding the initial investment made in the easement. The process begins with a comprehensive appraisal, valuing the land based on its ‘highest and best use.’ Subsequently, the land is revalued, taking into account the impact of the conservation easement – a permanent agreement affecting all future owners. The tax-deductible charitable contribution is calculated based on the difference between these two valuations, offering a significant financial incentive for investors

Buying a Land with Only a Portion of It is Considered a Conservation Easement

Investors can opt to purchase properties where only a fraction is designated as conservation land, reducing the extent of usage restrictions. For instance, acquiring a property with 25% under conservation easement allows for more flexibility in utilizing the remaining 75%. This approach offers a balanced solution, combining the benefits of conservation investment with greater freedom in property usage.

Conserve Some Unique Land Features / Owning a Land with Distinct Features

One of the key benefits of investing in land or property with an easement is the opportunity to conserve unique land features or vegetation. Easements restrict future owners from altering the land’s original habitat, ensuring the preservation of its distinct characteristics. This results in owning a property with unique features, offering a rarity that is not commonly found elsewhere, adding both ecological and aesthetic value to the investment.

Eligibility for Investing in a Conservation Easement

To invest in a conservation easement, you ideally need to earn more than $500,000.

Conservation easements are not for everyone. The ideal participant would need to earn more than $500,000, though accredited investors are eligible. You don’t have to be a landowner to take advantage of conservation easements. Syndicated conservation easements allow investors to partner with landowners to take tax deductions well above the money that they invest.

HOW TO DETERMINE IF THE PROPERTY OR LAND HAS A CONSERVATION EASEMENT

The initial step in determining whether a property or land holds a conservation easement involves a thorough review of its deed and land survey. To understand the specific restrictions imposed by the easement, prospective buyers should request a copy of the legal agreement from the seller, which details the terms and conditions. Additionally, it is advisable to consult the National Conservation Easement Database to obtain all relevant documentation and ensure a well-informed investment decision.

DRAWBACKS OF BUYING A PROPERTY OR LAND WITH CONSERVATION EASEMENT

Drawbacks of Buying a Land or Property with a Conservation Easement

When planning to buy land with a conservation easement, it’s crucial to understand the associated restrictions, especially if you intend to build a home. Portions of such land are often undevelopable, effectively reducing the usable area.

For those considering larger parcels, it’s important to note that conservation easements may prohibit or severely limit the subdivision of the property. This factor is essential to weigh in your investment decision.

Additionally, for agricultural purposes, be aware that conservation easements might restrict the construction of barns or other permanent structures on the land. This limitation can impact the scope of farming activities and should be factored into your planning.

Drawbacks of Buying a Home with a Conservation Easement

When purchasing a home with a conservation easement, it’s important to be aware of the restrictions on building permanent structures. These limitations typically include:

  • Erecting fences, retaining walls, sheds, or other permanent fixtures.
  • Altering the natural landscape, such as removing trees, bushes, or shrubs, unless necessary for safety reasons.

A significant consideration is the potential difficulty in reselling a property with conservation land. Prospective buyers may be deterred by the easement restrictions. Furthermore, even if you find a buyer amenable to these conditions, achieving your desired sale price can be challenging due to the perceived limitations on property use and development.

THE 2021 CHARITABLE CONSERVATION EASEMENT BILL

The “Act”

The Charitable Conservation Easement Program Integrity Act (“Act”) by Congress by Rep. Mike Thompson (D-CA), Senator Steve Daines (R-MT), and Senator Debbie Stabenow (D-MI) would likely change the rules on tax deduction for conservation easements . Once this bill has been enacted, the ambiguities that, according to the IRS (Internal Revenue Service), are being used by syndicated investor groups for abusive purposes would be eliminated. Unfortunately, the likely changes on the policy could potentially affect those who are using conservation easement in good faith since it would no longer allow deductions exceeding 250% of the real investment value of any partner.

FREQUENTLY ASKED QUESTIONS

What are the federal tax benefits associated with conservation?

The benefits derived from land conservation are categorized as non-cash charitable contributions under Section 170(h) of the Internal Revenue Code, rather than federal tax credits. As of 2014, these deductions can significantly decrease a taxpayer’s federal taxable income.

For individual taxpayers, the deduction is capped at thirty percent (30%) of their adjusted gross income. Corporations are limited to a deduction of ten percent (10%) of their federal taxable income.

There is ongoing and proposed legislation that aims to enhance these benefits. If passed, this legislation would increase the deduction limit for individual taxpayers from thirty percent (30%) to fifty percent (50%). This change would enable individuals to achieve a more substantial reduction in their current tax liabilities.

How are the federal tax benefits received?

When an individual becomes a limited partner in a partnership that elects to conserve property, they are entitled to a proportionate share of both federal and state tax benefits. This allocation is governed by the terms outlined in the partnership’s operating agreement. Such strategic partnerships enable taxpayers to leverage conservation efforts for optimal tax advantages, aligning with the latest regulations and opportunities in land conservation and tax planning.

How are the federal investments priced?

The return-on-investment (ROI) for conservation projects can vary, but there are common benchmarks for federal benefits. Typically, these benefits range between a 3.0-to-1.0 and a 4.0-to-1.0 ratio. For instance, at a 4.0-to-1.0 ratio, a taxpayer would receive a $4.00 deduction for every $1.00 invested. This ratio fluctuates based on factors such as supply and demand, along with other economic and non-economic returns anticipated from the project. Understanding these dynamics is key for investors looking to maximize their benefits from conservation investments.

What about state tax benefits, are those available?

In addition to federal benefits, many states allow these deductions to be applied at the state level, further reducing taxable income. Furthermore, several states provide specific state tax credits for land conservation within their borders. These credits offer a direct, dollar-for-dollar reduction in state tax liability, enhancing the financial incentives for conservation. States like Colorado, Georgia, and Virginia are noted for offering some of the most advantageous conservation tax credit programs, making them attractive locations for conservation-focused investments.

How are the state tax benefits priced and how much should I invest?

Each state has distinct regulations regarding the amount of conservation tax credits a taxpayer can utilize annually. Despite these variations, the pricing for these benefits is relatively consistent across states. In regions like Colorado, Georgia, and Virginia, tax credits are typically valued at around $0.85 for every $1.00 of credit.

Additionally, in certain states, taxpayers have the option to purchase certificated state conservation tax credits from already conserved projects. As of 2014, in states like Georgia, individual taxpayers can offset up to $250,000 in taxes per year, while corporations can reduce their tax liability by up to $500,000 annually. This flexibility in purchasing and using conservation tax credits makes them a valuable tool for strategic tax planning and sustainable investment.

If part of a conservation project, will I have a complicated process when I file my tax return?

Not at all. The project manager will provide us with an investment book and web access to documents needed to file your tax return. Credo will simply need to include a few additional forms when filing your return, all of which are included on your secure web folder.

What other economic returns on investment can I expect, outside of the tax savings?

Conservation projects encompass a range of economic benefits that extend well beyond potential tax incentives. Participants in these projects often gain access to a variety of recreational activities on the property, such as hunting, fishing, golfing, horseback riding, ATV riding, and hiking. Additionally, opportunities for naming rights in public parks and green spaces can arise.

Moreover, there are various potential revenue streams that partners in conservation projects can explore. These include income from sustainable timber harvesting, farming or ranching leases, and the sale of both developable and conserved land portions. These diverse benefits make conservation projects not only environmentally responsible but also financially rewarding.

Can I invest in conservation projects every year?

Credo collaborates with numerous taxpayers on varying schedules, including annual, semi-annual, and quarterly engagements. Our clients generally adopt one of two strategies:

  • Annual or semi-annual participation, designed to fully utilize the available federal and state benefits within the current tax year.
  • A biennial approach, where clients participate once every two years, carrying forward any unused benefits from the first year to offset tax liabilities in the second year.

There’s no universally correct strategy; it’s about finding the approach that aligns best with each taxpayer’s unique financial situation and objectives. Credo’s expertise in this field ensures that each client’s plan is customized to maximize their conservation investment benefits effectively.

If part of a conservation project, will I have a complicated process when I file my tax return?

Not at all. The project manager will provide us with an investment book and web access to documents needed to file your tax return. Credo will simply need to include a few additional forms when filing your return, all of which are included on your secure web folder.

Are conservation projects deemed to be a sale of securities?

Taxpayers who obtain conservation benefits through partnership models are, in effect, purchasing securities as defined by the Securities and Exchange Commission (SEC). It’s crucial for taxpayers to verify that any entity offering these investment opportunities is properly licensed by federal regulatory agencies, even in cases where the investment is a Private Placement. Firms dealing in these securities must comply with rigorous SEC and Financial Industry Regulatory Authority (FINRA) guidelines, established to safeguard investors.

Engaging with groups or individuals who lack the requisite licensing poses significant risks, as these entities operate without the necessary governmental oversight designed to protect investor interests. It’s important to note, however, that certificated state tax credits are not classified as securities and thus do not fall under the regulatory scope of the SEC and FINRA.

Will investing in conservation projects increase my risk of audit?

While the IRS has not published specific data, Credo’s analysis, informed by discussions with various stakeholders nationwide, suggests that approximately 10% of all conservation transactions undergo auditing.

A study by Forbes Magazine and Vogul Consulting indicates that taxpayers with incomes of $1 million or more face an inherent audit risk of about 14%, based on their income bracket alone. In conservation transaction audits, the IRS typically focuses on two critical aspects:

  1. Whether the taxpayer correctly completed and filed all necessary documents with their tax return.
  2. The accuracy of the property’s conservation valuation.

To address the first concern, qualified tax attorneys and independent third-party CPAs are instrumental in providing taxpayers with comprehensive, accurate documentation for their tax filings. For the second issue, a robust two-step valuation process is implemented. This involves a qualified, experienced conservation appraiser preparing the initial valuation, followed by an audit of this appraisal by a separate external conservation valuation expert. This meticulous process is designed to ensure valuations align with IRS regulations, thereby mitigating potential audit risks.

What information will Credo need in order to help me better understand how conservation benefits can reduce my tax liability?

In order to complete an investor benefit analysis for a particular project, Credo will need a copy of the first two pages of your previous year federal and state tax returns, your Schedule A Itemized Deductions, as well as your income projections for the current year.

When can I expect to make my investment?

Taxpayers wanting to mitigate their 2014 federal and state tax liability will need to be part of a project in calendar year 2014 before the property is conserved. Most conservation projects close between early September through December, so taxpayers should plan accordingly and make their investment before projects are fully subscribed for the year.

How can I learn more about conservation tax benefits and whether they are right for me?

We invite you and your advisors to reach out to Credo for an in-depth understanding of the advantages linked to conservation easements. We believe in the importance of conducting a comprehensive analysis of both the risks and benefits involved, ensuring that taxpayers make well-informed decisions.

Credo is committed to assisting forward-thinking taxpayers and their advisors in adopting ‘Green, Sustainable, and Socially Responsible’ approaches to tax mitigation. Our expertise in this area is designed to provide clarity and strategic insight into the complex world of conservation investments.

CONSULT WITH CREDO

Before investing in land, property, or a home with a conservation easement, it’s crucial to carefully consider both the benefits and limitations. While conservation easements offer attractive financial incentives, they come with certain restrictions that necessitate meticulous planning and expert guidance. Consulting with a seasoned conservation easement advisor is essential to safeguard your assets and ensure that your investment aligns with both your financial goals and conservation values.

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