Too-Good-To-Be-True Tax Break

Let’s imagine for a moment that you don’t like to pay taxes.  Somebody comes to you and offers an ‘investment’ that will give you an immediate tax write-off of four or five times the amount you pay—making it, after tax, profitable even if you never see a return on that money.  

This is the pitch for syndicated conservation easements, which give ordinary taxpayers the ‘opportunity’ to participate in a pooled investment that buys up property, grants an easement that permanently guarantees that some or all of it will not be developed, and shares the charitable tax benefits with the ‘investors.’  If you’re skeptical, you might be shown how land easements are fully embraced by conservationists as a way to protect wildlife habitats and environmentally critical watersheds, and some impressive legal documents showing the appraised value of the property to be encumbered.

Conservation easements by individual landowners are legal and even encouraged under the tax code, but their syndicated versions are dangerous.  How dangerous?  In a recent case, the Internal Revenue Service disallowed the deductions for a large syndication, and imposed penalties of 20% to 40% on the credulous ‘investors.’  Instead of a five to one write-off, the ‘investors’ received the privilege to pay the taxes they would have paid had they not made the ‘investment,’ plus a large surcharge.  And to top it off, they didn’t get their money back.

Selling tax breaks as if they’re investments generally involves some form of fraud, and in these cases, the fraud comes from overvaluing the land that is being donated.  In one example, company called Equity Investment Associates purchased 18 pieces of property for $12 million, and then, just six months later, found an appraiser who was willing to give a new valuation of $223 million—which, of course, is the value put on the easements that were eventually donated.  The too-good-to-be-true pitch to investors mysteriously left out this amazing increase in the appraised value.

Last October, the Internal Revenue Service issued regulations that don’t make these syndicated land easement programs illegal, but instead require operators that provide write-offs greater than 2.5 times the initial investment to disclose them to the agency.  But you can bet that every program, and every write-off, will be scrutinized on your tax return, and that those wonderful tax breaks will somehow involve property whose value has been improperly inflated.  The old saying that “if it looks too good to be true, it probably is” applies once again.

Sources:

https://landreport.com/syndicated-conservation-easements

https://www.irs.gov/newsroom/dirty-dozen-beware-of-abusive-tax-avoidance-schemes

https://www.gtlaw.com/en/insights/2024/10/irs-issues-final-regulations-for-syndicated-conservation-easement-transactions

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