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Conservation Easements

Updated: Oct 21, 2022

Hey everybody, Mark Yegge Here, wealth architect and host of the wealth architect podcast and I help seven and eight figure investors and entrepreneurs create safe, reliable income in their investments. But I also show people some interesting types of investments that maybe they’re not aware of and today, we’re talking about conservation easements. It’s a tax deduction, and a way to create a really cool return on your investment.

Listen, if you’re listening to this, as a wealth architect podcast listener, you’re going to probably want to watch this on video because I got a pretty slick little presentation set up and ready to go that’s got lots of slides and lots of examples and numbers, it’s hard to follow by just listening but I’ll do my best to walk you through the numbers.  It’s still pretty interesting. But if you can zip over to our channel, at Mark Yegge Team, and watch the podcast there, or you go to wealth architect, you’ll probably get a better idea what I’m talking about. So fair warning.

This is really a presentation for some of my wealthier investors. And if you’re not a wealthy investor, that is all good, just a little insight as to what wealthy investors do to hold on to their wealth and create outstanding returns. And I’m going to show you all about that now. So let’s get going.

Alright, so today we’re going to be talking about conservation easements, investing in conservation easements, so what the heck is a conservation easement? Well, first of all, I help people navigate the waters of beneficial investing. What does that mean? It means that I talk about things that are a little bit out of the box, but I want to get you to succeed.  I always say, “Never give up your power and your health, your wealth or your time”. And if you’re paying too much in taxes, it’s the biggest thing that we ever pay in our lives. If you’re paying too much in taxes, you can really save and give yourself a lot more wealth by saving those taxes. And in this case, we’re not just saving taxes, but creating an investment by saving those taxes. And I’ll show you what I mean. So, here’s a problem. And maybe this applies to you. The problem is your taxes are too high, I think we can all agree that we want to pay less in taxes and most high net worth investors, high income investors, they pay taxes that are higher than they need to be, they just do because they’re busy making money. They don’t seek out investments that can give you some deductions. So that is the case, not enough deductions, you know, you don’t seek them out; lack of awareness, sometimes you just don’t know. And your financial professionals don’t understand that the IRS creates tax loopholes that are beneficial for deductible investments. And then finally, some of those financial professionals, and maybe even individuals who make that income, are closed off to anything but the most standard types of investments. So, if you if your investment, if your financial professional is looking at you going “well, it’s not insurance, and it’s not a mutual fund, and it’s not real estate, and it’s not life insurance, and bonds and gold, then we really shouldn’t invest in it because it’s risky,” you probably need a new financial professional. If you’ve got a financial professional that brings you ideas on how to create deductions on your return so they can save you taxes, you’ve got somebody that’s worth their weight in gold. And that’s what I want you to have. But a lot of people, because they have financial professionals that are closed off to these new ideas, don’t get exposed to them, which is a real shame. But there’s a solution. And there’s a solution to every problem in life, right? And so, in any kind of solution in this area, this category, you’ve got to have some advanced preparation. Anticipating tax costs is something that you should be aware of, and you should start looking at alternatives of ways to bring it down. You’ve have to seek out deductions, and evaluate those deductions, you have to evaluate those investment opportunities, those profit potentials, and then you’ve got to invest in them. You can’t just watch them and let other people take advantage of them, you have to take action.

So, who is the ideal candidate for a conservation easement? Well, first of all, you should have a minimum income of about $500,000 a year or more, to really take advantage of this. Otherwise, you’re in a lower tax bracket, you really can’t take much advantage of this, you have to have a desire for lower taxes. If you’re paying too much in taxes, there’s a way to lower them through a conservation easement. I’m going to show you how we do that in just a second, you’ve got to be pretty financially savvy. In other words, you can’t just leave everything to your financial advisors, you have got to at least understand a little bit of the concept of risk and reward. And then finally, if you have a green bent, you’d like to conserve things for the future. You want to have a desire to make the world a better place, in this case, by making it green and creating property that the public could benefit from. You don’t have to have all of them but the ideal candidate will.

Now what is the solution to those things? Well, I want to talk to you about conservation easements today. And so, the first thing about it, without getting really wonky and deep into it because it’s not that complicated, is first of all you have to find a project that protects land from development. So that’s really the essential thing we’re doing here is we’re protecting land from development. And by donating property or an easement on the property, you can preserve land for future public use. By doing so, you create a tax incentive for yourself, of up to 50% of the adjusted gross income, and you get to use it for 15 years, not the five, that’s associated with most charitable deductions. And by the way, let me say here, I’m not a financial tax professional. I’m a wealth architect, I run hedge funds, and I help wealthy people do things, but you really need to get the people on your team, the tax professionals on your team to weigh in on this as well. But you know, at least if you bring it to them, at least they’re aware of it. And they can you guys can have a conversation about it. So, seek your own advice on this. But, you know, you really should, you really should take a look at it.

It’s an incentive covered totally by IRS tax code 170. H, and it was first enacted in 2006, and made permanent in 2015. And it’s really popular with the wealthy, as we’ll see as we go forward. So what’s the history of it? Well, it has a long history, going back to 1891. The first conservation easement was done in Boston, in 1976. There was tax reform that allowed landowners to report the easement value as a deduction on the return. In 2006, Congress raised the limits on deduction amounts in the carry forward years, which is really important, making them a 15-year deduction. And then 2015, Congress said, “Let’s enhance the tax incentive, let’s make this law permanent.” And they did. So, this law has been around for a long time. And it’s codified by Congress. It’s been around and it helps wealthy investors take incentives and deductions and maybe make some returns that they wouldn’t otherwise make. If you don’t own land, well, that’s okay. Because there are projects out there. I have one, by the way, it’s to invest in an easement. So, you have to locate suitable property and a suitable investment. And that’s pretty easy to do, once you know that they’re out there. And then you have to get third party evaluations, that’s a major part of what we are talking about here. And that you have to determine the donated value, you have to determine the value of what the property would be if it were developed. And then you get to deduct the difference.  I’ll show you what that means right now. So, here’s how it works. You’ve got an LLC, that donates a piece of property or an easement on the property to a nonprofit, you know, most of the time, it’s a governmental entity to preserve that property for perpetuity. So, you might want to preserve that property or let’s say, a park, then what you do is you determine what the appraisals are. You can’t do the appraisals; you have to have a third-party appraiser do them. But you determine what the property is worth before you donate it. In other words, if you donate it as a park, what would it be? If we did a development on this project? What would that project be worth? Would that easement be worth if we developed it? In other words, if we didn’t donate the easement, then you take the difference between the two, and you can deduct those for the next 15 years. So, here’s an example. First of all, you appraise it for the development potential, then you appraise it for the donated value. In this case, let’s call it a park. And then the difference is the tax deduction. So, let’s say you want to do a development on this property or this property could support a development like a housing development or apartments or something like that. And if you do that development, this particular project is worth, say, $10 million. But if you were to donate it, what would the project be worth if you gave it as a park to the county or the city or something like that? Maybe it’d be worth $100,000. Well, that difference is 9.9 million. That’s your deduction that you get to deduct on your tax return. Okay.

So now that you have this, now, you can show I can show you how wealthy investors have done it and I’m going to pick out Donald Trump because he’s the one that’s in the news. And like him or hate him, he certainly knows his way around the tax code. And he’s got a team of people that help him with this. So, Trump created a $39.1 million deduction in 2005. Basically because of the high taxes the state, local and federal in New Jersey, he was able to create a $20 million deduction in New York to a $20 million deduction approximately right about 50%. So just by creating a deduction, he saved himself $20 million in taxes. Here’s how it worked. He bought this property called Bedminster Country Club and he turned it into Trump National Golf Club Bedminster. And when he did that, he said, “Okay, I agree, because there’s a lot of development on golf courses these days. I agree not to turn my golf course into a housing development. I could make a lot more money if I developed it as a housing development and just bulldoze all the greens of the fairways, but I’m going to keep it as a golf club because if I do that, I get to conserve it forever as a golf club.” Well, the public benefits from that, because they get green space, the county benefits from that, because it’s not developed and creates infrastructure problems on the roads. Everybody kind of wins there, Trump certainly won because he saved $20 million in taxes.

Here’s how he did it. He got an appraisal for 49 and a half million dollars as 33. Lots if he were to develop this 18-hole golf course, into 233 Lots, but he left it as a golf course, at $10.4 million. That’s the conservation of green space. Now, that’s what it would be worth if he left it as a golf course, the difference was a $39.1 million deduction. And he took that on his tax return, pretty smart, right? Love him or hate him. He’s a smart business person when it comes to getting tax deductions. And Mar a Lago has been in the news a lot lately, but a $5.7 million deduction for designating certain historical features at Mar a Lago as just that, historical features. That’s a conservation easement use. And so, he got tax savings of approximately $2.8 million. At the time, he did this several years ago, when he was not a Florida resident. And so, on four properties all together, Trump used $119.3 million in tax deductions. And he saved himself $60 million in taxes using IRS code 170 H.

And so, this is a legitimate incentive that the IRS puts out there, because they want people to designate things for future use for future green use and use cases. And it benefits the public, but it also benefits the donor.

Okay, so how does it lower your taxes, now I’m going to get a little wonky. And here, you’re going to have to look at some numbers. If you have this on video, it’s easier to look at the numbers, but each dollar into the project is going to create a $5 deduction, that’s the profile of this example investment. So that means every $100,000 you invest in the project is going to create a half a million dollars’ worth of deductions. Now, a half a million dollars in a high tax state is going to be about $250,000 worth of taxes, saved at a 50% rate. Okay, got that, it’s a five to one deduction. All right. So, let’s take the example of investor one here. So, he’s got an income of $750,000. And he’s got a pretty good tax team, because he can take about 15% off that income, with deductions, bringing him his adjusted gross Income down to$ 633,007 50. That brings his total tax cost to $222,000. Now, I don’t know about you, but that’s a big tax bill. So, we’re paying big taxes $220,000, that’s a big amount of tax, leaving him with $527,000 in net income, still pretty good. Now with the easement investment, he brings his adjusted gross income, because remember, you can deduct up to 50% of your adjusted gross income for up to 15 years, he brings his Adjusted Gross Income down now from 633 to 316. And that basically cuts his total tax costs, and this includes the value of the easement for this particular year, this includes that value. The tax costs now become instead of $222,000, they are $140,000. Bringing his total net income to $609,941. So, he took his net income from $527,000 to 609,000, if you’re not watching the graphic here, basically, this conservation easement saved him $82,000. So, he got more, they got to keep $82,000 more, which basically brought the return on the conservation easement and investment 230%.

Okay, by the way, it brought his tax rate down from 29.7% effective tax rate to 24.2% effective tax rate. But the bottom line is that his return on investment was 130%. Now, I don’t know about you, but some investors go 10 years without creating 130% return. This gets 130% return immediately, as soon as it’s taken. Pretty cool, right?  Well, let’s go through some more. Same profile, a $1 investment in gets you a $5 deduction out. But now we’ve got an investor who is making a bit more money at $2.6 million. And his tax team again saved him about 15% of his gross. He’s got his AGI down to $2.19 basically, meaning he’s paying taxes of $980,000 Huge amount of taxes, right? What if he could save those tax costs by some amount by using an easement? Well, if he does, then he brings down his million his

$2.6 million is AGI goes down from 2.2 million out now to 1.098 500. So, one basically 1.1 million instead of 2.2 million in AGI. He brings his total tax costs, and this includes the value of the investment he made to get the deductions down to $599 781. So, from $980,000, he’s now paying basically $600,000 In total tax costs, that brings his net income up from 1.6 million to 2 million. So, he ends up making about $380,419, just by doing this investment, so he gets an income gain, otherwise, that he wouldn’t have gotten without the investment of $380,000. That’s 173% return on his investment. Pretty good, right? So, if you find these deductions out there, that fit the profile and fit your profile, you can actually end up keeping $380,000 more than you would have. Now, I don’t know about you, but I would like to have $380,000 more to keep than to give to the IRS. I just think that’s fair. And you know, what’s fair, it’s legal. It’s an incentive that the IRS carves out so that you do this, it’s an incentive, they want you to do this.

All right, let’s change the profile. Instead of being you put $1 in and you get a $5 deduction. Let’s say you put $1 in and you get a $3 deduction. Okay? So basically $100,000 invested will create a $300,000 deduction. So now we’ve got a gross income of $2.1 million. So, you got investor two, A is making $2.1 million tax team brings it down to 1.774 500 million. Okay, which makes the investor have to pay a tax cost of $703,500. Now, with the easement, your adjusted gross goes from 1.7 million to $880,000. So, you basically cut that AGI in half. And now instead of paying $700,000, in taxes, you’re paying $550,000 in taxes, which brings your net income up from 1.4 million to 1.5 and a half million. Basically, you got to keep an extra $150,000 by doing this investment, all in, which basically is a return on investment of 85% still pretty darn good, right?

How many investments do you have that are making you 85%? At the time that you make them, you know, you’re going to get that that return. You know, they’re going to get that return on their investment of 85%. Immediately, you don’t have to wait 10 years to get it or five years or even a year to get it, you get it right now, as soon as you make the investment.

All right, same investment profile, three to one or one to three, we could say. And now we’ve got an investor that makes $3.4 million a year and has the potential to make that in the future. And he’s got a tax team that brings his AGI down to 2.8 million, pretty good. But he’s still paying $1.2 million in tax. That’s a big tax burden, right? So, she says, ”I’m going to invest in a conservation easement.” And so, she brings her adjusted gross down to $1.4396, which drops her tax bracket down from 35 to 32, by the way, and so instead of paying $1.2 million in total taxes, now she only has to pay only $945,000 in taxes, basically saving herself $247,704 in taxes, that’s money she gets to keep by doing this conservation easement. It’s an 86% return on the investment.

So hopefully by those examples, you can see that there’s some significant savings when it comes to using a conservation easement strategy.

So, using the deductions, let me just reiterate some of the key points about the deduction. First of all, you can deduct up to 50% of your AGI. If you’re a farmer, and you make more than 50% of your income from farming, you could deduct all of it, all your AGI not just 50%. But most people aren’t farmers. And if they aren’t, call me and I’ll hook you up, but you can deduct up to 50% of your AGI. You can also carry forward the unused portion of the deduction. So, let’s say you take a $10 million dollar deduction and you want to use all of it. And you’re making $3 million a year well, in six years, you’ll be able to use that all up, because you’re only taking half of it against your AGI. So, you can carry that up to 15 years. That’s pretty cool. Because if you have the expectation of making money in the future, you can tap into this investment for the future. So, it’s really actually quite simple. It’s almost like donating furniture to Goodwill. But there’s a couple other things from your perspective. You make an investment, and then you use the deduction from the other side of it, there’s a couple of more steps that need to be done from the investment company side. But basically, they locate a suitable investment project or you want to you determine what the tax benefits going to be. And then they find a suitable “donee”. So, in this case, we’ve been talking about an example about donating it to a government, and then you, the company will accept the investment into the property, then you’ll get a couple of appraisals, you’ll get your first one. And same at the same time, you’ll prepare the deed for recording into the property, which designates the conservation easement, as a green property, or for public use for perpetuity, and then you’ll finalize the last details. You’ll get the last appraisals done, you’ll record the deed, and then you can begin using those deductions immediately. This whole process probably takes a few weeks, and then you’re off and running. If it’s already ready to go, then you can maybe shortcut that a bit more.

All right, so who wins in this? The investor is going to win, right, you’re going to get a tax deduction, you’re going to create an above average return by taking that deduction. So, you’re going to win as the investor, the nonprofit entity wins. So, the government basically furthers their mission by fostering a property that will benefit the public for perpetuity. Now, the public also wins, because they get to enjoy public use space that’s maintained at no cost. And not just this year, not next year, but forever. So that’s always going to be conservation forever. Think about Central Park, it’s never going to become a development, right? It’s always Central Park that the public could can use.

Let me summarize by saying, you know, first of all, in my next video, I’m going to talk about the pros and cons of conservation easements, because there are some cons that you need to be aware of. And if you’re not aware of the IRS you can kind of frown upon them. So, you have to know what you’re doing when it comes to that. But conservation easements can essentially be a lucrative tax deduction and an investment opportunity that helps to create desirable green spaces that the public can enjoy for years to come. And basically, it’s a win-win-win for everyone. I hope I was able to shed some light on the conservation easement opportunity. If you want to learn more about it. First of all, the wealth architect podcast is making a series on conservation easement investments. So, you’ll be able to click on the wealth architect Or go to Mark Yegge team on YouTube. And you’ll be able to just search on conservation easements. I’ll have a playlist there that will have the different ways that you can learn about conservation easements. So, the bottom line is you can see why I really believe in the benefits of a conservation easement, you get a deduction. It’s also a pretty good return on investment rather than if you didn’t do it. And, you know, I just think there’s so many benefits for wealthier investors to be able to take advantage of our tax code that gives you incentives to take these deductions and also create public projects that work out for perpetuity for public use. So, I think you’ll see that it’s a pretty cool project and I want to thank you for being here on this edition of the wealth architect podcast.

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