Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Conservation Easements for Tax Breaks
Transcript
- Lucas: Conservation easements. If you've ever read about a wealthy family donating development rights on a ranch or a forest, you've probably wondered: is that philanthropy, or is it a tax move? Luna: And the honest answer is… both. That's what makes it so interesting. Lucas: Right. Structurally, a conservation easement is a voluntary legal agreement where a landowner permanently restricts the use of their property to preserve its conservation value. They donate that restriction to a qualified land trust or government agency. And in return, they get a charitable deduction equal to the appraised value of the easement. Luna: Which can be huge. Because the value of the easement is the difference between the land's fair market value before the restriction and its value after. If you own raw land in a path of development, that spread can be massive. Lucas: Exactly. Let's use a specific case. A family in Georgia — I'll call them the Harrisons — owned about 2,500 acres of timberland in the Chattahoochee River basin. They'd held it for three generations. Original basis was maybe six hundred thousand dollars, adjusted for inflation. By 2024, the land was worth around 18 million dollars. Luna: So if they sold, they'd face capital gains on 17.4 million. But if they donated an easement…? Lucas: They worked with a land trust and an appraiser. The pre-easement value was 18 million. Post-easement, the land could only be used for sustainable forestry and limited recreation — no residential development, no commercial timber operations beyond selective harvest. The appraiser pegged the post-easement value at 6 million. Luna: So the easement donation is valued at twelve million dollars? Lucas: Correct. They donated the easement in 2025. That gave them a twelve million dollar charitable deduction. Under IRS rules, they can deduct up to 50 percent of their adjusted gross income in the year of the donation, with a 15-year carryforward for any excess. Luna: That's a huge tax shield. Especially if they have high ordinary income from other sources — businesses, investments, carried interest. Lucas: Exactly. The Harrisons' AGI that year was about 8 million. So they deducted 4 million in year one, and they'll carry forward the remaining 8 million over the next 14 years. Over that period, assuming constant AGI, they'll save roughly 4.4 million in federal income tax, assuming a top marginal rate of 37 percent, plus Medicare surtax. Luna: And they still own the land. They can live on it, hunt on it, harvest timber — within the easement restrictions. They just can't develop it. Lucas: That's the core appeal. You get a significant tax benefit while keeping the asset in the family and preserving it. It's a classic win-win, but only if you don't need the liquidity from a sale. Luna: And only if the IRS agrees with the appraisal. That's been a battleground. Lucas: Huge battleground. The IRS has scrutinized conservation easements aggressively, especially syndicated easements where multiple investors buy into a partnership, donate an easement, and claim outsized deductions. In 2022, the IRS placed syndicated easements on its Dirty Dozen list of tax scams. Luna: But the Harrisons — they're not a syndicate. They're a family with a long-held property. Does that make a difference? Lucas: It does. The IRS's primary target is the syndicated model, where the deduction can be 5 to 10 times the investor's cash contribution. But even legitimate family easements get audited. The key is a defensible appraisal, a qualified land trust, and strict adherence to the conservation purpose. Luna: And you need to be able to prove that the easement serves a bona fide conservation goal — like protecting water quality, habitat, or scenic views. Lucas: Exactly. The Harrisons' property sits in a watershed that supplies drinking water to Atlanta. That's a strong conservation purpose. And their timber management plan is certified sustainable. So the easement is genuinely protective, not just a tax dodge. Luna: That reminds me — I've read that some families pair easements with a land trust that handles monitoring. The trust visits annually to ensure compliance. That adds a layer of credibility with the IRS. Lucas: Absolutely. And it's worth noting that the deduction itself is subject to a 50 percent AGI limit, but for farmers and ranchers, there's a special rule: they can deduct up to 100 percent of AGI. The Harrisons don't qualify as farmers, but it's a big benefit for agricultural families. Luna: Right. The 100 percent rule was made permanent in the 2020 omnibus bill. That's a game changer for ranchers with high land values and relatively low cash income. Lucas: And one more nuance: the easement reduces the value of the land for estate tax purposes. After the easement, the Harrison's property is valued at 6 million instead of 18 million. That saves their heirs a lot of estate tax. Luna: So you're getting income tax savings during life and estate tax savings at death. It's a double dip, but it's legal. Lucas: Legal and encouraged by Congress. The tax code explicitly incentivizes conservation. The deduction was expanded in 2015 and again in 2020. Lawmakers want private landowners to preserve open space without the government having to buy it. Luna: But there's a downside, right? Once you donate the easement, it's permanent. You can't change your mind. If your kids want to sell for development later, they can't. Lucas: Correct. That's the trade-off. You're giving up future development value. So it only makes sense if you're committed to keeping the land in its natural state. For families with a strong conservation ethic, that's fine. But if there's any chance you'll want to monetize the land later, don't do it. Luna: And if you do it through a syndicated partnership, you're almost guaranteed an IRS audit. The Tax Court has consistently ruled against those structures. In 2023, the court upheld penalties in a case where the deduction was 11 times the investment. Lucas: Yeah. The syndicated easement space is effectively shut down now. But the traditional family easement is still very much alive. Especially for families with low-basis land that's appreciated enormously. Luna: So the takeaway: if you own rural land you love, and you don't plan to sell, a conservation easement can be one of the most tax-efficient moves you'll ever make. Lucas: But you need a good team — a qualified appraiser, an experienced land trust, and a tax attorney who knows this area. The IRS doesn't trust self-appraisals. Luna: Speaking of teams and good advice — if our conversations have helped you think about your own financial decisions, we'd love your support. This show is ad-free and listener-supported. You can buy us a coffee at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. Lucas: It really does help us keep the research and production going. And we appreciate every contribution. Luna: Alright, back to easements. Lucas, you mentioned the 15-year carryforward. But what happens if the family sells the land later, after the easement? Lucas: Good question. If they sell the encumbered land, the buyer takes it subject to the easement. The sale proceeds are lower, obviously, but the capital gain is also lower because the basis is unchanged. And the charitable deduction already reduced their income taxes. So it's still tax-efficient, even if they eventually sell. Luna: Unless the IRS recaptures some of the deduction on sale? Is there recapture? Lucas: No recapture for conservation easements. The deduction is a done deal. But there is a potential issue if the easement is terminated or modified — say, by court order. Then the donor may have to include some amount in income. But that's rare. Luna: So you're essentially pre-paying a charitable contribution via the deduction, and the land stays in the family. That's a powerful legacy tool. Lucas: It is. And it's something more families should consider. Land is often the most emotional asset in a portfolio. A conservation easement lets you keep it while aligning your taxes with your values. Luna: And if you ever want to generate liquidity from the land without selling, you could take out a loan against it. The easement reduces the value, but a lender might still lend against the post-easement value. Lucas: True. Some families do exactly that — use the land as collateral for a line of credit, then invest the proceeds. It's a way to monetize without triggering a taxable sale. Luna: Alright, final question: is there a minimum land size for a conservation easement? Could you do it on 10 acres? Lucas: Technically, yes. But the deduction is proportional to the value given up. On 10 acres with minimal development potential, the deduction might be small. The IRS also looks at the conservation purpose. Ten acres in a suburban area might not pass the 'significant public benefit' test. The Harrisons' 2,500 acres in a watershed? That's easy. So size matters, but context matters more. Luna: Good to know. For most high-net-worth families, the sweet spot is probably 100 acres or more, with some ecological or scenic significance. Lucas: I think that's right. And as always, talk to your advisors before making any moves. This is a permanent decision.