Charitable Donation Deduction through Conservation Easements
Ebenezer Scrooge may have needed some convincing, but for many, charitable donations are the hallmark of the holiday season. Those can include monetary gifts or even donations of property. These good deeds can also benefit the donors via tax breaks.
Land donations, particularly for conservation, can offer positive returns. In 2015, Congress enacted one of the most powerful conservation measures in decades: The enhanced federal tax incentive for conservation easement donations. In the late 1970s, Congress added section 170(h) allowing landowners to claim a tax deduction of conservation easements to a Qualified Land Trust. In 2006, Congress extended the deduction, and in 2015. Congress made the law enhanced and permanent.
This bipartisan enhancement in the law was for the purpose of encouraging landowners to use this large tax deduction as an incentive to promote greater private funding for conservation. The law allows landowners, partnerships, and Limited Liability Companies (LLCs) to take a Charitable Donation Deduction for the value of the donated conservation easement. The taxpayer can offset up to 50 percent (100 percent for farmers and ranchers) of their adjusted gross income as a charitable deduction. The remainder of the deduction can be carried over for 15 years, or until it is consumed, whichever is sooner.
So what is the value of the donation? The land has to be placed into a Qualified Land Trust for “perpetuity.” The donating landowner can retain the right to grow crops on the parcel, but relinquishes the right to build structures or develop the property.
To determine the value of the deduction, there must be qualified appraisals for the value of the property before, and after the easement. The restrictions of use for perpetuity diminish the fair market value of the property so this difference is a Charitable Contribution to the Qualified Land Trust.
What if you don’t own any property?
Consistent with established partnership tax law, private equity investors come together with the landowner in the form of a Partnership or Limited Liability Company (LLC) and then, as a viable alternative to development of the property, consider making a conservation easement donation. As an investor in the Partnership or LLC, you will share in the deduction personally.
Purchasing an investment interest in the aforementioned Partnership or LLC works very well for high income W-2 earners who don’t have many deductions. I use this for my SEC college football coaches that have large W-2 amounts and very few deductions.
This is how the scenario works: The Partnership or LLC prepares a prospectus to investors which have an opportunity to purchase partnership interest or LLC units. The amount of the Partnership or LLC Conservation Easement Charitable Deduction passes through to the owners via a K-1 form filed with the Partnership or LLC tax return. Usually, the ratio of the amount invested to the amount of Charitable Contribution Deduction is as much as 4 to 1 (if it is more than 4:1, I would suggest staying away from that investment). That would mean the appraisal after the easement is way too low and could be challenged by the IRS.
Below is an example with numbers:
Based on purchasing 1,000 units of the LLC: The Charitable Contribution per unit purchased would be approximately $1,800.
If you buy 1,000 units at $450 per unit, the total investment cost would be approximately $450,000. The total value of the Charitable Contribution for the 1,000 units would be $1,800,000 (1,000 * $1,800).
This results in a 4:1 ratio of the deduction per dollar invested.
At a 43 percent (federal and state) tax rate, this would give rise to a tax savings of approximately $774,000.
Smaller investments are also allowed, and can be done. Most of the prospectuses have a bottom threshold investment of $10,000 to $50,000.
Your return on investment is the tax savings. Usually, your equity investment will be absorbed with expenses of the LLC.
Coastal CPAs have been providing our clients assistance with Conversation Easement Charitable Deductions for many years. For more information about Conservation Easem ent Charitable Deductions, contact Coastal CPAs at 912-638-1010.