Donating large tracts of land to a charitable organization in exchange for a sizable tax deduction sounds like a win-win, but is it?
We are hearing of more and more partnerships or LLCs becoming involved in syndicated conservation easement transactions, in which the partnership or LLC purchases land for the purpose of donating the property to a qualified charitable organization. The members of the donating partnership or LLC then receive a tax deduction based on the difference between the purchase price of the donated land and the appraised fair market value of that property.
The basic way this works is like this: Partnership M purchases a parcel of land for $100,000 to donate to a charitable organization dedicated to the preservation of wildlife. The appraisal value of that parcel is $500,000. Therefore, each member of Partnership M receives his or her portion of a $400,000 tax deduction.
While these transactions may sound like a good deal for both the recipient organization and members of the donating business, we urge caution before entering into these kinds of arrangements. Large deductions often claimed on tax returns indicate that the donated property may be grossly overvalued, triggering an audit. Indeed, the IRS is stepping up enforcement against listed syndicated conservation easement transactions, most of which do not pass muster.
Taxpayers who claim a deduction on these transactions and are then audited face the risk of having to repay the deduction claimed – many times in the amount of several thousands of dollars. Further, those taxpayers are now in the crosshairs of the IRS, which may undertake a deeper and more wide-ranging audit of the individuals involved in the syndicated conservation easement transaction.
If you are considering participating in a conservation easement transaction, please contact us first so we can evaluate your situation and advise you through the process.
Deanna A. Olton, CPA, is Director of the Business & Tax Advisory Group. She can be reached at firstname.lastname@example.org. Tammy C. Howell is a Manager with the Business & Tax Advisory Group. She can be reached at email@example.com.