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Fight Club & Conservation Easements

“The first rule of Fight Club Conservation Easements is: You do not talk about Conservation Easements.” Yes, a tax planning article is an odd place for a reference to a cult classic film from more than two decades ago, but stay with us: Fight club’s famous rule illustrates the mysterious aura that surrounds conservation easements, because the IRS has created an environment in which this strategy is not openly discussed.

We’re here to demystify this strategy. Why the secrecy? What even are conservation easements, and what makes them so intriguing? This article will unfold the world of conservation easements, exploring their structure, benefits, and potential growth, the IRS’s approach, and the risks involved.

What Are Conservation Easements?

Let’s start with the basics. A conservation easement is a legal agreement between a landowner and a qualified organization, such as a land trust or a government agency, that restricts the development of the land in perpetuity, protecting for conservation purposes — say, protecting wildlife habitats or preserving historic sites — even if the property is sold or passed down to future generations. Conservation easements, in short, are a way for landowners to protect their property from future development, no matter who ends up in control of the property.

Critically for our purposes, conservation easements are also a tax tool. When you agree to restrict the use of your land to the conservation cause, the government considers that a charitable donation, and you’ll get certain associated deductions. More on this in a bit, but first, the how.

How Do Conservation Easements Work?

When a landowner donates land or other property to a conservation easement, they give up some of the rights to their property, such as the right to develop the land for whatever purpose they want. For example, the landowner might agree to preserve the land for natural use — a nature conservancy, for example — meaning they will not be able to build on the land in the future, even if they want to. The donated conservation easement becomes a permanent part of the property’s title, binding on all current and future owners.

In exchange for giving up the right to develop the land how they want in the future, the landowner will be eligible for a tax deduction equal to the value of the thing they’re giving up — the easement. But what is the value of the land? You might think it’s just what you paid for it, but there’s another layer: the concept of “highest and best use.”

How Is The Land Valued For Its Charitable Deduction?

There isn’t usually a large, liquid market for perpetual land easements and, as a consequence, there aren’t many comparable sales to serve as the basis for a valuation. Instead, the valuation of any such easement is generally made using a “before and after” approach.

When appraising a property for the purposes of donating or selling a conservation easement, the appraiser will typically assess the property’s value in two scenarios:

  1. Before the Easement (Unencumbered Value): This estimates the property’s value considering its “highest and best use” without any development restrictions. This is essentially the property’s full development potential value.
  2. After the Easement (Encumbered Value): This estimates the property’s value with the conservation easement restrictions in place, which could limit or eliminate certain development possibilities.

The difference between these two values represents the value of the conservation easement itself. This difference can be significant, especially in areas with high development pressures. Now critically, there are two charitable deduction approaches with conservation easements:

  1. Just the conservation easement (you retain land ownership): In this scenario you are just limiting the development on the land but retain ownership of the land for use outside of that development. From a charitable deduction standpoint, your deduction is limited to the conservation easement, or the difference between the before and after easement value.
  2. Fee simple land donation (you give away land ownership): In a fee simple land donation you are not only adding a conservation easement to the land but also giving away ownership of the land to a charitable entity. In this scenario, your charitable deduction is the value of the easement and the land or the highest and best use value.

To make this more digestible, let’s walk through an example. Let’s say you bought land for $1 million, the highest and best use of the land is valued at $5 million and the encumbered value with the conservation easement is $2 million. As a result you would receive a different charitable deduction based on which approach you used.

  1. Just the conservation easement (you retain land ownership): $3 million charitable deduction based on the difference between the highest and best use of the land $5 million and the after easement value of $2 million ($5 million – $2 million).
  2. Fee simple land donation (you give away land ownership): $5 million based on the value of the land and the highest and best use of the land but you won’t enjoy use of the land.

How Can You Invest In A Conservation Easement?

There are two common approaches for individuals to participate in a conservation easement:

  1. Individual: A single owner puts their land in an easement.
  2. Syndication: Multiple individuals pool their money to invest in a large conservation easement project. Now critically you can’t invest in a fund that is a conservation easement fund, the fund has to have a real estate purpose and can later decide to put the easement on the land and/or donate it to charity. Hence the first rule of Fight ClubConservation Easements being “you do not talk about Conservation Easements.”

What Are The Tax Benefits Of Conservation Easements?

A landowner who donates their land with an easement may be eligible for a federal income tax deduction of up to 50% of their adjusted gross income (AGI) in the year of the donation, equal to the before value of the donation, with the ability to carry forward any unused deduction for up to 15 years.

Put more simply, you can earn a deduction against your income for the highest and best use of the land after putting an easement on the land and donating the land. And if the highest and best use value of the land is 5 times your purchase price, your tax savings are 2.5X your purchase price (assuming a 50% tax rate). In recent years, typical highest and best use valuations on easement land have been 4-6x the purchase price. It won’t surprise you, then, that the popularity of conservation easements has been growing rapidly.

The Rapid Growth Of Conservation Easements

Conservation easements have grown rapidly in popularity in recent years, with a total of 1.6 million acres of land newly protected by conservation easements in 2018 alone. Between 2010 and 2017, taxpayers took an estimated $26.8 billion of charitable deductions from conservation easements. This growth has been driven by a number of factors, including an increasing awareness of environmental issues and the collective desire to preserve natural resources for future generations, but the biggest impact has probably been the tax benefits.

In fact, these benefits have been so powerful that the IRS has chosen to focus on reducing abuse of conservation easements.

IRS Record Against Conservation Easements

The IRS has become increasingly interested in conservation easements in recent years as a result of the tax savings and growth. Oregon Sen. Ron Wyden, chair of the Senate Finance Committee, speaking on Conservation Easements said “there is a tax shelter gold mine here, and they’re fighting very hard to protect it. There are enormous sums of money to be made as long as the number of transactions keeps increasing.” To fight back against these transactions, the IRS has been cracking down on technical errors, many of which may appear minor — incomplete forms, inadequate appraisal records, inaccurate deeds — as well as less rigorous claims like the lack of apparent charitable intent in the transaction and the absence of significant public benefit, all with the goal of discouraging people from taking advantage of these structures.

Moreover, the IRS has proposed new regulations to dramatically curtail syndicated conservation easements. Under proposed rules, conservation easement transactions would be considered abusive, or a “listed transaction,” to use agency parlance and give the agency powers to disallow the deduction, if they have the following four hallmarks:

  • 2.5x+ multiple on the basis: The arrangement is advertised in promotional materials stating that investors can expect to receive a charitable contribution deduction worth at least 2.5 times the amount of the taxpayer’s investment;
  • Investment through a fund: The investor has an interest in a partnership or pass-through entity that owns the real property i.e. is a syndication with multiple investors owning the land and benefiting from the easement
  • Fund donates the land: The pass-through contributes the property as a conservation easement and allocates a charitable contribution deduction to its partners;
  • Charitable deduction: The partners report a charitable contribution deduction on their federal income tax returns.

The last three factors describe most conservation easements; indeed, the last two are required for the easement to serve its tax-planning purpose. Accordingly, the first factor is the whole ballgame: If an easement yields a 2.5x or greater charitable deduction, the transaction will be a listed transaction and presumptively suspect.

If the transaction is considered a listed transaction, that means that any time an individual claims a deduction as a result of the transaction, they have to let the IRS know they are doing so, which makes it easy for the agency to audit the deduction. However, the IRS doesn’t have a great record in Tax Court when challenging conservation easement tax deductions hence the focus on technical errors, but the increased scrutiny has led to greater caution among some investors.

Risks For Investors

Investing in conservation easements carries risks, including the potential for the IRS to challenge the tax deduction — and potential interest, penalties, and fees as a result. To mitigate those risks, interested individuals should typically choose a fund with General Partners who have a long history in the space, as the details are critical.

For those who are willing to take on these risks, investing in conservation easements may provide a unique opportunity to make a positive impact on the environment while also potentially receiving significant tax benefits.


Conservation easements provide a unique investment opportunity for individuals interested in both environmental conservation and potential tax benefits. While there are some risks associated with investing in conservation easements, the potential environmental and tax benefits make it a worthwhile investment for many.