How they work and why the IRS cracked down

A version of this article originally appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to high-net-worth investors and consumers. become a member to receive future editions straight to your inbox.

Congress is moving to expand the land conservation tax incentive that has been under IRS scrutiny for nearly a decade. The farm bill’s House and Senate proposals would create a new program that would provide funds to landowners who agree to keep forests intact rather than sell or develop them.

The IRS cracked down on conservation easements after investor groups used them to obtain billions of dollars in inflated tax breaks. But lawyers who specialize in conservation easements told CNBC that the tax strategy still has value for individuals and families who want to preserve their land and pay less to Uncle Sam.

More than a dozen states offer some form of tax credit for land donations, and some, including New York, Colorado and Georgia, have aggressively expanded conservation easement programs in recent years.

“I run into people who say, ‘Wow, conservation easements are bad things. They’re exploitative.’ No, they’re not. “They’re for a small group of people and a small group of people who are drawn into this by bad actors,” Florida attorney Keith Fountain said. “My clients are people who own land and love the land, and conservation easements provide a way to get some financial benefit and hold, own and manage that land for the right purposes in perpetuity.”

Conservation easements allow landowners to maintain ownership of the property while giving up certain development rights. Typically, the property owner agrees to permanently limit how the property can be used, usually to preserve farmland, wildlife habitat, or open space. The landowner can then donate these relinquished development rights or sell them at a discount to a land trust, government agency, or other qualified group.

In return, the owner can claim a charitable deduction. In most cases, they can reside on the land and use it for recreational purposes, such as hunting and fishing, as long as they comply with the easement restrictions.

Fountain said many of his farming clients sell conservation easements to keep the land in the family and use the proceeds to pay off debt or buy out younger family members who aren’t interested in farming. Customers raise cash by selling easements on their land at a discount and can claim a charitable deduction for the difference between the sales price and fair market value.

The transactions the IRS targets have long involved groups of investors, not individual landowners. In these so-called syndicated conservation easement agreements, a promoter sells interests in the land to investors and donates the easement. By using an inflated valuation of the property’s development rights, investors can claim a tax deduction that exceeds the amount they paid for the land.

In a recent example presented last week, the U.S. Tax Court made a cut. $41.6 million cut $800,000 was requested by the Alabama partnership. The court agreed with the IRS that the deduction was based on a speculative assessment of the property’s limestone quarry potential.

Congress set limits on conservation easement values ​​in 2022 to close out syndicated easements, but the IRS is still reviewing about 1,100 cases. The agency extended the deadline compromise offer in May in order to reduce the backlog.

Although the government has targeted syndication deals, individuals can still trigger an IRS audit by donating easements. That’s why Fountain said his clients often choose to sell easements at a discount, even though donating them can bring better tax benefits.

Many attorneys refuse to advise on conservation easements altogether. But former IRS national fraud counsel Carolyn Schenck told CNBC that conservation easements should not be deleted.

“Just because some taxpayers abuse the rules, I don’t think that means the underlying policy lacks value in any way,” said Schenck, who left the IRS in 2025 for the law firm Caplin & Drysdale. “I think there is a view within the IRS that a properly backed conservation easement is not a loophole.”

Over the past two years, the Tax Court has typically focused on how much the land’s relinquished development rights are actually worth, according to attorney Diana Norris, associate director of conservation advocacy at the Land Trust Alliance. This focus on valuations eliminates a lot of uncertainty for land trusts and landowners, he said, because previous conservation easement cases often boil down to technical flaws in title or donation paperwork.

Attorney Steve Small said conservation easements are not risky if you work with an attorney who follows case law and applies them frequently. While at the IRS in the early 1980s, Small helped write the tax code for conservation easements.

The biggest problem, he said, is dealing with customers who have unrealistically high expectations for how much they can cut, which he blamed on syndicated easement supporters. For recently purchased properties, the deduction will be a percentage of the purchase price, not a multiple, according to Small.

Donors should also consider less obvious factors that could reduce their deductions, he said. For example, easements can increase the value of surrounding properties by preserving scenic views and privacy. If the easement benefits nearby property owned by the landowner or a relative, the additional value should be subtracted from the deduction, Small said.

He also recommends that clients include multiple photos of the land with their form submissions.

“What does the IRS get when you get an easement deduction? A bunch of typed papers,” he said. “They don’t feel the beauty of the project or the views of the open space at all.”

If the conservation easement is intact, the audit risk is minimal, especially if the IRS is understaffed, Small said.

“Frankly, I think if you do a good, honest conservation easement project today, the risk is lower than it was 10 years ago,” he said.