Section 170(h)

IRS Code 170(h) is a section of the Internal Revenue Code that provides tax benefits for landowners who donate a conservation easement on their property. This page answers some of the most frequently asked questions about IRS Code 170(h) and conservation easements.

What is a conservation easement? 

A conservation easement is a voluntary legal agreement between a landowner and a land trust or government agency that permanently restricts certain uses of the land in order to protect its conservation values. These easements allow landowners to continue owning and using their land while also preserving the natural, agricultural, or historical attributes of the property.

One of the main benefits of conservation easements to Americans is the protection of open space and natural habitats. They safeguard landscapes from development, ensuring that wildlife habitats, wetlands, forests, and farmlands are preserved for future generations. This helps maintain biodiversity and promotes ecological health.

Conservation easements also contribute to the preservation of scenic views and cultural heritage. They ensure that historically significant lands and structures are protected, thereby preserving the character of rural and historic communities.

In addition to these environmental and cultural benefits, conservation easements can also provide significant economic benefits. They can increase property values of surrounding land due to the assurance that the area will remain undeveloped. They can also support local economies by preserving agricultural lands and supporting agritourism, and by maintaining attractive landscapes for recreation and tourism.

Lastly, conservation easements offer tax benefits to landowners. When a landowner donates a conservation easement to a land trust or government entity, they may be eligible for a federal income tax deduction. The deduction is based on the easement’s fair market value, which is typically determined by the land’s value for its highest and best use before the easement minus its value after the easement.

In sum, conservation easements provide a valuable tool for landowners to preserve the natural beauty and ecological integrity of their land for future generations, while also receiving potential tax benefits. They are a key part of America’s strategy for land conservation and environmental stewardship.

Are criticisms of conservation easements unfair? 

Critics of conservation easements often argue that they limit economic development and unduly benefit the wealthy. However, these criticisms fail to recognize the essential role that conservation easements play in safeguarding our country’s unique ecosystems, biodiversity, and natural heritage.

Firstly, conservation easements are a powerful tool for preserving critical habitats and biodiversity. By protecting lands from development, they help to maintain the health of our ecosystems, which are fundamental to our well-being and survival. Ecosystems purify our water, clean our air, enrich our soils, provide habitat for wildlife, and offer us places of beauty and solace. The loss of these ecosystems due to urbanization, agriculture, and industry is one of the greatest threats to our planet.

Secondly, the claim that conservation easements unduly benefit the wealthy is a shortsighted view. While it’s true that tax incentives often benefit landowners who have the financial means to set aside land, this approach also encourages the private sector to contribute to conservation efforts. Without these incentives, many of these lands might otherwise be developed, resulting in the loss of critical habitats and open spaces.

Lastly, the argument that conservation easements limit economic development overlooks the economic value of ecosystems and the services they provide, often referred to as ecosystem services. These include benefits like water purification, climate regulation, and pollination of crops, all of which have substantial economic value. Moreover, preserved lands often support local economies through tourism and outdoor recreation.

Rather than discouraging conservation, we should be celebrating and encouraging these efforts. The challenges of biodiversity loss and climate change require us to use every tool at our disposal, including conservation easements. Discrediting these valuable tools based on narrow criticisms only serves to undermine our shared goal of preserving the Earth for future generations.

 

How do conservation easements work? 

  1. Identification of Conservation Values: The landowner and the land trust or government agency work together to identify the conservation values of the property. These might include wildlife habitat, scenic views, wetlands, forests, or farmland.
  2. Drafting of the Easement: The specific terms of the conservation easement are drafted in a legal document. This document outlines the activities that are allowed and prohibited on the property to protect its conservation values. For instance, the easement might prohibit subdivision or development, but allow for continued farming or forestry.
  3. Appraisal: An appraiser determines the value of the easement, which is typically the difference between the land’s value before the easement and its value after the easement is in place.
  4. Donation or Sale of the Easement: The landowner either donates the easement to the land trust or government agency, or sells it to them. Sometimes, a landowner might sell an easement for less than its appraised value, which is known as a “bargain sale.”
  5. Monitoring and Enforcement: After the easement is in place, the land trust or government agency is responsible for monitoring the property to ensure the terms of the easement are being upheld, and enforcing the easement if necessary.

 

From a tax perspective, if a landowner donates a conservation easement to a land trust or government agency, they may be eligible for a federal income tax deduction. Under the U.S. Tax Code, specifically Section 170(h), a landowner can deduct the value of the easement from their income taxes. The deduction is limited to a certain percentage of the donor’s adjusted gross income (currently 50%, or 100% for farmers and ranchers), and can be carried forward for up to 15 years. In some cases, landowners might also be eligible for state income tax credits or estate tax benefits. However, it’s important to note that tax benefits depend on the individual circumstances of the landowner and the specifics of the easement, and landowners should always consult with a tax professional before proceeding.

Is the IRS unfairly targeting conservation easements? 

The Internal Revenue Service (IRS) has faced criticism for its approach to conservation easements, with some arguing that its scrutiny of these transactions is unwarranted and unfair. This critique is based on several reasons.

Firstly, conservation easements are a vital tool for environmental conservation. They provide a way for landowners to protect their property from future development while receiving a tax benefit for their contribution to the public good. The IRS’s aggressive scrutiny of these easements may discourage landowners from utilizing this important conservation tool, which could ultimately lead to less protected land and greater environmental degradation.

Secondly, the tax benefits of conservation easements are a form of public policy, designed to encourage private landowners to participate in conservation efforts. When the IRS challenges these tax benefits, it could be seen as undermining this policy objective. While it is essential to prevent and address any abuses of the system, it is equally important that these efforts do not discourage genuine conservation efforts.

Thirdly, the IRS’s scrutiny of conservation easements may disproportionately affect small landowners. Larger landowners or corporations may have the resources to navigate complex tax investigations and disputes, but smaller landowners may not. This could create a system where only the wealthy can afford to participate in land conservation, which would be contrary to the public interest.

Lastly, it’s worth noting that the IRS’s focus on conservation easements represents a significant allocation of resources that could arguably be better spent elsewhere. The potential for abuse of conservation easements is relatively small compared to other areas of tax law, and the societal benefits these easements provide in terms of environmental conservation are immense.

While it’s important for the IRS to ensure the integrity of the tax system, its approach to conservation easements should be balanced and fair. It is crucial to remember the significant public benefits that these easements provide, and to ensure that IRS policies do not inadvertently discourage these valuable contributions to our shared environment.

 

What is a syndicated conservation easement?

A syndicated conservation easement is a type of arrangement in which multiple investors pool their resources to buy property and then donate a conservation easement on that property. These syndicates are usually structured as partnerships, with each investor contributing capital in exchange for a share of the partnership. Once the easement is in place, the investors claim a tax deduction based on the easement’s appraised value. 

Syndicated conservation easements emerged as a way to facilitate the conservation of larger or more expensive properties that might be beyond the reach of a single landowner. By pooling resources, multiple investors can acquire and conserve properties that might otherwise be developed. This allows for the protection of significant landscapes, habitats, or historical sites that may not have been conserved without the syndication.

Moreover, syndicated conservation easements also democratize the conservation process, allowing more individuals to participate in land conservation. This not only expands the pool of potential conservation funding but also broadens societal involvement in and commitment to conservation efforts.

Despite these potential benefits, it’s important to note that syndicated conservation easements have been subject to scrutiny due to concerns about overvaluation and abuse of the tax deduction associated with conservation easements. However, the core concept of syndicated conservation easements – leveraging collective investment to conserve properties that might otherwise be developed – remains a powerful tool for land conservation. Ensuring that these deals are structured and appraised correctly can result in meaningful conservation outcomes and play a significant role in preserving valuable lands for future generations.

Is the IRS winning in court? 

The IRS has been engaged in a tremendous number of legal battles regarding conservation easements, but with very limited success. 

For example, the IRS recently suffered a major loss in court.  In Green Valley Investors, LLC, et al., Bobby Branch, Tax Matters Partner v. Commissioner of Internal Revenue, the United States Tax Court held in November 2022 that IRS violated the Administrative Procedure Act’s requirements when it classified syndicated conservation easements as “listed transactions”​1​.

In reality, the IRS only wins cases that involve clear fraud or wrongdoing or minor technicalities. For example, a North Carolina land appraiser pleaded guilty to defrauding the United States as part of a syndicated conservation easement tax shelter scheme, which involved inflated charitable contribution deductions based on a fraudulent appraisal value of a conservation easement. The appraiser had fraudulently inflated the values of at least 18 conservation easements, resulting in a tax loss to the IRS exceeding $129,000,000​.

While it’s clear that there can be abuses of the conservation easement system, these cases should not detract from the significant environmental and conservation benefits that these easements can provide. Instead, they highlight the need for robust and fair valuation methodologies and transparency in these transactions.

What is a land trust? 

In the context of conservation easements, a land trust is a nonprofit organization that actively works to conserve land by undertaking or assisting in land or conservation easement acquisition, or by stewarding such land or easements. Land trusts can be local, regional, or national in scope, and they conserve a variety of types of land, including natural, scenic, recreational, agricultural, historic, or cultural property.

Land trusts play several key roles in the establishment and management of conservation easements:

  1. Partnership with Landowners: Land trusts work directly with landowners who are interested in conserving their land. This often includes providing information about conservation options, discussing the landowner’s goals, and exploring whether a conservation easement might be a good fit.
  2. Easement Negotiation and Acquisition: If a landowner decides to pursue a conservation easement, the land trust often helps to negotiate the terms of the easement. This includes identifying the conservation values of the property, deciding which activities will be allowed or prohibited to protect these values, and determining the bounds of the easement.
  3. Stewardship and Monitoring: Once an easement is in place, the land trust becomes the steward of the easement. This includes regular monitoring of the property to ensure the terms of the easement are being followed, maintaining a relationship with the landowner, and addressing any potential violations of the easement.
  4. Enforcement: In the event of a violation of the easement terms, the land trust is responsible for enforcing the easement. This can include working with the landowner to address the issue or, in rare cases, taking legal action to uphold the easement.
  5. Long-term Commitment: When a land trust accepts a conservation easement, it takes on a long-term commitment to uphold the easement’s restrictions in perpetuity. This ensures the land’s conservation values will be protected for future generations.

In essence, land trusts are a critical player in the conservation easement process, providing the knowledge, expertise, and long-term commitment needed to ensure the effective and lasting conservation of valuable land.

Why does the IRS target conservation easements? 

The Internal Revenue Service has targeted certain conservation easements, particularly syndicated conservation easements, due to perceived abuse and overvaluation of easements that can result in significant tax deductions. The IRS, like any tax authority, has a mandate to ensure that tax laws are correctly applied and that tax savings are only taken where legitimately due. This motivation, however, does not change the fact that conservation easements were established by Congress as a legal mechanism to incentivize private land conservation.

Congress created the conservation easement deduction as a way to encourage landowners to voluntarily conserve their land in perpetuity. This tool has been instrumental in conserving millions of acres of land across the United States that might otherwise have been developed or degraded. It is important to note that while the IRS’s job is to ensure tax laws are correctly applied, it does not have the authority to override or disregard laws passed by Congress. The tax benefits associated with conservation easements are not a loophole or a mistake, but a policy choice made by Congress to incentivize land conservation.

However, it is also important to recognize that any tax incentive can be abused, and it is the IRS’s role to prevent and address such abuse. Unfortunately, this necessary enforcement activity can sometimes appear as if the IRS is unfairly targeting conservation easements in general. This perception can potentially discourage legitimate conservation activity and cause harm to the overall conservation efforts.

 

In conclusion, while it is the IRS’s duty to prevent abuse of tax incentives, it is equally important that their enforcement activities are fair, reasonable, and do not discourage the lawful use of conservation easements for land protection. The ultimate goal should always be the preservation and conservation of our nation’s valuable and irreplaceable lands.

What happened with that notorious fraudulent conservation easement scheme? 

Walter “Terry” Douglas Roberts II, a land appraiser from North Carolina, was implicated in a case of fraudulent activity involving syndicated conservation easements. The case unfolded over a decade, from 2008 to 2019, during which Roberts conspired with others to fraudulently inflate the values of at least 18 conservation easements. By manipulating appraisal methods, making false statements, and using manipulated data, Roberts was able to reach targeted appraisal values that resulted in desired tax deduction amounts. Some of his appraisals were inflated by as much as 70%, leading to tax deductions totaling approximately $466,961,000 and causing a tax loss to the IRS exceeding $129,000,000. The case culminated in a guilty plea from Roberts, who was charged with conspiring to defraud the United States and faces a maximum penalty of five years in prison, along with potential restitution and monetary penalties​​.

However, while the egregious actions of Roberts rightfully attracted attention and legal action, it’s critical to differentiate his actions from the broader use and purpose of conservation easements. The case of Roberts represents an abuse of the system, not an indictment of conservation easements as a whole. Conservation easements are essential tools for land preservation, providing tax incentives for landowners to protect natural habitats and open spaces. Currently, conservation easements preserve around 40 million acres of open space and wildlife habitat in the United States, with land trusts stewarding about half of those acres​​.

The fraudulent actions of individuals like Roberts should not be used to smear all conservation easements. Such cases are outliers, and they do not reflect the overall integrity and importance of conservation easements. Fraud, in any form, is wrong, and it is essential to remember that the actions of one individual or a group of individuals do not define the entirety of a system or process. The vast majority of conservation easements are used properly, contributing significantly to the preservation and protection of vital lands and ecosystems across the United States.