Conservation easements offer a unique way for wealthy taxpayers to achieve their philanthropic goals while securing substantial tax deductions. However, recent developments from the IRS, Congress, and the courts have made some taxpayers hesitant to utilize these arrangements. When structured correctly and in compliance with the latest rules, conservation easements remain a valuable tax planning tool.
Tax Advantages A conservation easement restricts the use of real property, granted by the property owner to a qualified organization in perpetuity and exclusively for conservation purposes. This organization must commit to upholding the conservation purposes of the donation and have the resources to enforce the restrictions.
Generally, a charitable deduction is disallowed for the donation of a partial property interest (other than some trust transfers). However, since the 1970s, taxpayers have been allowed to claim deductions for the fair market value of donated conservation easements, encouraging significant property owners to preserve buildings or land by donating certain ownership rights to nonprofits.
Increased Scrutiny In recent years, the IRS has highlighted abuses related to conservation easements, often stemming from promoters relying on questionable appraisals. According to the IRS, some taxpayers have claimed undue deductions by failing to meet requirements or by using property in ways that conflict with its charitable purpose. Syndicated conservation easement (SCE) transactions, in particular, have faced scrutiny, with the IRS labeling them as part of its "Dirty Dozen" tax schemes due to inflated appraisals and partnerships used to generate "grossly inflated" deductions.
Government Response SCEs are under intensified scrutiny. In December 2022, the IRS proposed regulations identifying SCE transactions as listed tax-avoidance transactions, mandating reporting to the IRS. Shortly after, Congress enacted the SECURE 2.0 Act, providing the IRS with statutory authority to regulate conservation easement abuses by partnerships and other pass-through entities, reinforcing the agency’s stance.
The SECURE 2.0 Act also introduced a "disallowance rule" that limits charitable deductions for easements where the claimed deduction exceeds 2.5 times each partner's relevant investment basis in the partnership. Exceptions apply if:
- The contribution meets a three-year holding period,
- Substantially all partnership interests are held by family members, or
- The contribution preserves a certified historic structure.
The IRS finalized regulations on the disallowance rule in June 2024, including definitions, partner basis calculations, exceptions, and reporting requirements. This includes disclosures for partners and S corporation shareholders receiving noncash charitable contributions from partnerships or S corporations, covering qualified conservation contributions of real or other noncash property.
Settlement Opportunity In June 2024, the IRS announced a settlement offer to taxpayers in SCE transactions under audit, requiring concessions of tax benefits and penalties. Declining this offer may lead to continued IRS enforcement, including potential full disallowance of deductions and penalties. In January 2024, an IRS criminal investigation concluded with significant prison sentences and nearly $1 billion in restitution for two promoters selling SCEs with inflated deductions, underscoring the IRS's commitment to curbing these abuses. The government’s aggressive stance on conservation easement transactions highlights the need for strict compliance, yet the IRS acknowledges that legitimate easement contributions warrant deductions. For taxpayers interested in charitable easement contributions, our Reynolds + Rowella tax advisors can help you structure and navigate these contributions properly, ensuring they align with the latest regulatory requirements. Contact us to explore how conservation easements may fit into your tax planning and philanthropic goals.
Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve. Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.
