Charitable Conservation Easement Tax Update

By Author: Mary Rose Somera
Total Articles: 94
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As you may know, in recent years there has been a lot of scrutiny by the IRS and DOJ over the use of Non-cash Land donations [Charitable Conservation Easements – CEs] by partnerships. This type of legislation has been floating around for years, but the conversation this year so far has been much different than in years past. This update is based on the conversation at the time of this writing. You can click here to review the updates to the bill.

This year, Congress is discussing:

• Most important thing being discussed is the removal of the retroactive provisions. This would mean that any pre-2022 tax year real estate projects you participated in would be free from scrutiny beyond actual compliance with the laws in place at the time. Since retroactive provisions have been unsuccessful for going on 5 years now by Congress, the removal of this provision makes the likelihood of the amended legislation going through (in some form) to be higher.

• Limiting the amount of the contribution by a partner to 2.5% of their relevant basis. This bill imposes a limitation on the tax deduction for qualified ...
... conservation contributions made by certain partnerships if the amount of the contribution exceeds 2.5% times the sum of each partner’s relevant basis in the partnership. This limitation also applies to other pass-thru entities, such as S corporations. However, if the investor participates in a project that closes before the bill passes it appears they may still claim full the deduction.

• Disallow donations done after the effective date (and the tax benefits associated with the project as such).All conservation partnerships would be disallowed going forward (based on the effective date of the amended bill and the date of donation of the conservation property). This date is estimated at December 1stthis year. Carryforwards would NOT be affected.

• The proposed law would cap the charitable deduction for CE donations at 250% of the property’s purchase price unless the land has been owned for at least three years. Earlier versions of the proposed Act made the law change retroactive, effective December 23, 2016. It is highly likely, that before any final vote, the amended bill will be further amended to carve out/allow for conservations partnerships related to Oil, Coal, or Natural Gas. We are already geared up for / have moved in this direction, for the very reasons the legislators are favoring them. The valuations on these types of projects are very defensible and have less proclivity for fraud versus a very subjective valuation on a commercial real estate development.

Fee Simple Partnerships Would Still Be Allowed in Full (it appears based on the current wording of draft legislation)

This amended bill ONLY covers conservation projects. We could expect to see the entire industry rapidly shift to fee simple donations if this bill is passed in its current form.

Practical Considerations for 2022 and Beyond

1. Being risk averse might look like: participating early in 2022 and considering future years for carryforward deductions to limit the opportunity cost risk.

2. Taxpayers who want to donate to a charitable conservation easement should be aware of legislative plans.

3. Taxpayers who have deducted charitable contributions for conservation easements should watch for the reintroduction of these bills.

4. The increased scrutiny and skepticism surrounding conservation easement deals require tax professionals like our team at Credo COFs & CPAs. Contact us about conservation easements.

5. Given the retroactive provision changes and the potential contribution deadline this could be the best time to ever participate in CEs. At CREDO, we recommend participating in “Highly Defendable CE Projects” – see below

The right conservation Easement projects have key components that make them highly defendable:

1. Intrinsic Value – The value of the project is easy to see and touch and is not based on a plan but has a carbon factor [Oil and Coal]

2. Experienced Project Managers that are involved with the legislation and not involved with the valuations

3. Proper reserve and insurance to see the project through to the end

4. Land managers that care about endangered species and green?

5. A Legal team that has the proper experience with documenting and defending these types of projects

6. Actual investment intent and execution capabilities