Reading the news this morning an article caught my attention, Couple must pay nearly $600G for removing oak tree from their property, judge rules. My first thought was "this doesn't seem right, how can you be sued for making changes to land that you own".
The article indicated the land use was part of conservation easement that prohibited clearing the tree and disturbing the natural habitat. Unfortunately I didn't know what a conservation easement was so I had to do more reading to understand the problem.
Land owners will sometimes sell off the mineral rights to property allowing whoever bought the rights ownership of the minerals underneath the soil. This might come into play if a neighbor has an oil well drilled near the property line that would pull oil from underneath the property in question. In this case the new owner of the mineral rights would receive payment for the oil rather than the owner of the property. The owner of the property has given up any right to the minerals found on the property. A conservation easement is very similar. In this case the owner donates some agreed upon usage right of the property for a tax deduction worth the established value of what was given up in the property. Once these usage rights are given up, any future owner of the property is also subject to the agreement.
The legislation allowing this arrangement of giving up usage rights on property for income tax deductions was meant for people to limit the use of the land they owned forever. An owner of a large tract of wooded land could donate the right to build housing on the land and take a tax deduction for the donation. As with most tax codes, this is subject to abuse. Sometimes, property owners may donate usage rights they may not have. In a historical district of a city there may be building codes designed to maintain the historical feel of the area, a property owner could not donate his ability to modernize the outside of his property since the building codes have taken that right away from them. In other cases the value of the donation has been artificially increased to 9 times the value of the investment donated. This could easily mean the property owner could get tax deductions worth more than the property itself.
In 2015, Congress changed some of the IRS rules associated with conservation easements. Some of these changes include:
- Raising the deduction a donor can take for donating a conservation easement to 50%, from 30%, of his or her annual income;
- Extending the carry-forward period for a donor to take a tax deduction for a conservation agreement to 15 years from 5 years; and
- Allowing qualifying farmers and ranchers to deduct up to 100% of their income, increased from 50%.
So, by simply donating a potential usage for my property that I have no intention of acting on I can generate an income tax deduction that eliminates 50% of my tax burden for up to 15 years. From the article New IRS Scandal - Syndication Of Conservation Easement Deductions:
All you need is some property and a lot of imagination about what conceivably could be there - like the gold mine under my townhouse. Mining operations would disturb the squirrels that my covivant is always yelling at because they eat from the squirrel proof bird feeder. I'm thinking of an easement to the Save the Squirrels Foundation.
What a deal! I can donate my right to dig a gold mine on my property and get some expert to place a huge value on the amount of gold I could get from my mine and take away 50% of my tax burden for 15 years. Additionally, I can sell the property and the next owner is also prohibited from digging a gold mine but I retain all the benefits of donating the right to mine for gold.
While I started out feeling sorry for the landowner in the original article, it's difficult to maintain that feeling. It's unclear if the couple having to pay almost $600,000 for moving a tree originally donated the rights to do so or were a new owner of the land. Either way, it's hard for me to feel sorry for them since they have since placed the property up for sale at $8.45 million.