The Great Recession has triggered a rising tide of real estate and tax abuse centered around land trusts that is going ignored, the Internal Revenue Service, Congress’ Joint Committee on Taxation and the Government Accountability Office have all warned.
Land trusts, in which landowners donate land to trusts in an effort to obtain billions of dollars in federal tax deductions, have allowed some property owners to wipe out all of their federal tax bill.
More than 47 million acres are estimated to be in land trusts across the country as of 2010, nearly double the amount in 2000, according to a census done by the Land Trust Alliance, a nationwide conservation group. In the 48 contiguous states, there are twice as many acres in conservation easement as National Park land, says the Land Trust Alliance.
Here’s how the tax dodge works: many real estate speculators took advantage of dirt-cheap prices to buy land whose value was driven down during the recession. The property owners then donate the land to the trust -- or nonprofit – at an inflated assessment value, but can then continue to own and even make money off the land.
Landowners can wipe out up to half of their taxable income with the move. Farmers and ranchers can even try to wipe out 100% of their adjusted gross income with these conservation donations, and even erase all of their federal tax liability for the next 15 years.
After donating the property, the trust can then apply for a conservation easement on the property to prevent development. The land can then stay in the trusts in perpetuity, or the trust can sell the land to a third party, often the government.
But woe to the nearby landowner who seeks to develop his or her own property. If they so much as deign to defy established nearby conservation restrictions by, say, building a new fence, one or several of the country’s 1,700 or so land trusts will take them to court, resulting in huge legal fees for the neighboring landowner who was sued by the trust. In fact, the powerful national Land Trust Alliance has created a nonprofit insurance company, Terra Firma, to help trusts with the legal costs for bringing these lawsuits. The company won nonprofit status from the Internal Revenue Service last year.
On top of that abuse the IRS also notes that the rise in land trusts has triggered severe abuse of taxpayers— and the powerful Joint Committee on Taxation concurs. While land trusts can preserve historic buildings or land, as well as nature preserves, they can curtail economic growth, federal agencies have found.
Moreover, multi-billion dollar non-profits, many of whom earn more and have more assets than corporations, often take advantage of land trusts, even though they already have many special tax breaks, including tax-free donations.
The abuse of this tax loophole is on the rise as the U.S. federal debt has cut federal funding for conservation and as environmental advocacy groups trim budgets. The Senate’s fiscal cliff deal also delivered even more tax breaks to land trusts, a big fat capital-gains tax exemption for contributions of property for conservation—which promises to encourage even more taxpayer abuse.
The land trust deduction really does nothing other than provide a tax dodge; and it is a huge tax dodge – costing the U.S. government billions of dollars a year, estimates the Joint Committee on Taxation. Both the IRS and the Joint Committee on Taxation have “identified overvalued donations of conservation easements as a particularly problematic issue,” notes the Government Accountability Office in a June 2012 report, adding, “the problem persists.”
In a report in 2005, “Options to Improve Tax Compliance and Reform Tax Expenditures,” the most powerful tax committee in Congress questioned the rationale of permitting these tax deductions in the first place, deductions which also lead to lost economic growth and lost tax revenues. Such tax “benefits constitutes a windfall rather than an incentive” to the landowner, says the Joint Committee on Taxation.
If Congress and the White House want to enact tax reform, how about the low-hanging fruit of this dodge?
What the IRS has seen, as have state attorneys general across the country, are landowners inflating the value of their land in an attempt to increase tax deductions for land trusts.
“We have seen taxpayers, often encouraged by promoters and armed with questionable appraisals, take inappropriately large deductions for easements. In some cases, taxpayers claim deductions when they are not entitled to any deduction at all,” the IRS says in a statement, adding: “Also, taxpayers have sometimes used or developed these properties in a manner inconsistent with section 501(c)(3).”
The agency notes: “In other cases, the charity has allowed property owners to modify the easement or develop the land in a manner inconsistent with the easement’s restrictions.”
The GAO also notes that “in 2011 the Department of Justice sought and the district court for the District of Columbia issued an injunction against a company that [the] IRS identified as improperly encouraging taxpayers to seek appraisers who would misvalue conservation easement contributions on building façades for noncash charitable deductions.”
The GAO also says that “from 2007 through February 2012, 500 individual tax returns were adjusted” after IRS “audits of deductions relating to conservation easements.”
California and New York officials in particular have seen a rise in inflated values of land in order to boost tax deductions for landowners. Wisconsin has seen it too.
Government officials have also seen a rise in the number of landowners demanding conservation easements on lands to help curtail development. On the flip side, other landowners have tried to take tax deductions for restricting development that they know would never occur in the first place, notes the Santa Clara Law Review.
Land trust abuse has also popped up in mortgage fraud cases. Florida is now dealing with cases where landowners use land trusts as straw buyers to grab land from homeowners in exchange for promises that their mortgages will be wiped out—which doesn’t happen.
In Palm Beach County alone, 90 Palm homeowners have signed their deeds over to a land trust in this network of abuse. The homes range from million-dollar waterfront mansions in Boca Raton to $60,000 condominiums west of Florida’s Turnpike.
“This mortgage relief scam targeted hundreds of distressed homeowners who were already facing financial hardship,” said Attorney General Pam Bondi.
Massachusetts enacted the first land trust, the “Trustees of Reservations” ' in 1891, which acquired the twenty-acre Virginia Woods in order to preserve it. Now, 122 years later, an estimated 1,667 land trusts operate in all fifty states, with the lion share created in just the last two and a half decades.
The number of land trusts had been growing at a flat rate from the 1960s through the seventies, but then tax and regulatory relief led to an explosion in the eighties.
Land trusts have increased in number in concert with the tax and regulatory breaks doled out by government. In 1980, Congress under President Jimmy Carter enacted new tax legislation to codify permanently "the deductibility of conservation and historic preservation easement donations." Seventeen years later, the federal government enacted The Taxpayer Protection Act, which let a decedent's estate deduct up to forty percent of conserved land's value, capped at $500,000, from the decedent's federal estate tax liability.
The number of land trusts then increased by one-third between 2000 and 2005, says the Santa Clara Law Review. From 2005 to 2010, the number of acres conserved by land trusts nationwide grew 27 percent. In California, land trust acreage grew even more than the national average, a whopping 34 percent in the state from 2005 to 2010.
California has the highest number of land trusts, holding more than 2.3 million acres of land. Research indicates the largest concentration of land trusts is still in the Northeast.
State and local governments have gotten in on the act, with a boom in state and local bond issuance for conservation. In just 2006 alone, 133 measures were passed in California, Georgia, New Jersey, South Carolina, and Texas to issue bonds for land trusts, in total amounting to an estimated $6.7 billion.