In this episode, Toby Mathis, Esq., of Anderson Business Advisors, chats with Tyler Surat of One Tree Advisors. Tyler is a seasoned expert in tax mitigation and land conservation strategies, who is helping clients utilize conservation easements to preserve land while mitigating taxes. You’ll hear the definition and benefits of conservation easements, the challenges posed by IRS scrutiny on certain easements due to misuse by “bad actors,” and the importance of understanding state-specific tax laws. Tyler emphasizes the necessity of due diligence before pursuing an easement, considering factors like property registration and the differences between group and individual applications. Tune in for valuable insights into navigating the complexities of conservation strategies and tax implications.
Highlights/Topics:
- Toby introduces Tyler, from CPA to CFO
- What is it, and what’s covered under a ‘Conservation Easement’?
- The IRS is contesting some easements from ‘bad actors’ in the real estate business
- Groups vs. individuals
- Is the property on a National Registry?
- Tax laws in your specific state need to be considered
- Audits can be a risk due to past individuals who have misused this tax break
- Due diligence is essential before requesting an easement
- Get in touch with Tyler at his email below with your questions
- Share this with new investors you know
Resources:
Connect with Tyler Surat
Email: tsurat@onetreeadvisors.com
Schedule Your FREE Consultation
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Full Episode Transcript:
Toby: Hey guys, Toby Mathis, and today I have Tyler Surat with me to go over the state of conservation easements and all the good stuff that goes along with this. We may even get into some solar. We’ll see. But welcome Tyler.
Tyler: Thanks, Toby. A pleasure to be here again.
Toby: Tyler’s been on before. Tyler, why don’t you give your background so people understand who you are and how you got into the whole world of conserving properties? Then we’ll get into all the changes that occurred in the last couple of years.
Tyler: Yeah. A long long time ago, I went to school to be an accountant. I thought I was going to be a CPA and things like that, kind of migrated towards a more active role in helping clients and being a part of that. I worked my way up to being CFO, and was a contract CFO for quite some time.
Then tax mitigation as a CFO comes into play and had met some individuals that were doing this type of strategy, conservation strategy, about almost 15 years ago, and used it for clients and then ultimately just kind of put me out there and educating myself on the subject matter and joining a group that this is what we do with some other for-profit investments and using the strategy to mitigate those incomes and those for-profit stuff.
Lots of changes in those 10 or 15 years, but most definitely have been a part of the good and the bad. This is where we’re at with 2024 conservation and inflation reduction acts and historics and all sorts of things.
Toby: Let’s go over in a nutshell, some people have never heard of a conservation easement. They have no idea what it is. Maybe they’ve heard about it in the context of Donald Trump and Mar a Lago and how he got massive deductions, but can you just do a thumbnail sketch of what a conservation easement actually is?
Tyler: Yeah. A long time ago President Reagan crossed the aisle in a bipartisan agreement. We have a really good history of when the easements were created, but pretty much back then in the 80s they decided that the U.S. government could not preserve as much land as they wanted to, so they decided to incentivize people to privatize that preservation.
What they ended up with was the fact that people can develop the land or they can not develop that land. If they did not develop that land, then they would give them a significant deduction for that non development and that deduction was going to equal what they could have developed on that land.
Almost a fair trade-off, but also made it a charitable deduction, which was a huge part of the history of conservation easements. But it was only a 30% deduction for quite some time. You saw wealthy individuals using this strategy because they could afford to buy land or you saw agricultural purposes for this to pay tax bills or deduct high-income years and things like that.
But as we progressed, in order to stimulate the economy, it became a part of the stimulus bills, in the 13th, 14th, and 15th era and ultimately as that stimulus, they wanted to increase the deduction to a 50% deduction. Now it made sense for somebody who was in and made $500,000 or more to begin to look at this strategy.
Conservation truly, in fact, is just the preservation of land for charity purposes, I would say, or a conservation purpose. If you’re reading the tax code, it’s a watershed, it’s pleasure for enjoyment, it’s a lot of things and can qualify for a lot of things, but it’s basically undeveloped land that will remain undeveloped for quite some time that somebody got a tax deduction for doing so.
Toby: I grabbed the IRS conservation easement audit technique guide. I always look at how the IRS is viewing things. They’re saying that the easement must be granted in perpetuity exclusively for, like you just spelled out, one of the following purposes.
Number one was to preserve the land for public recreation or education. Number two, to protect a relatively natural habitat of fish, wildlife, and plants. Number three, is to preserve open spaces either for public scenic enjoyment or according to a governmental conservation policy that yields a significant public benefit. Number four, is to preserve a historically important land area or a certified historic structure.
In English, you take this thing and just tell me if I’m wrong, let’s say that I have land, I could develop it or I want to preserve it, but I want to get a tax benefit for preserving it. I could preserve that land by giving a grant, let’s say, to Ducks Unlimited or one of these big groups. I could give them an easement in perpetuity for the use of that property or that will never be developed.
I get a tax deduction based on the fair market value of that value of what it would have been. If the development value is $10 million and because of what I’m giving, it’s worth a million. I would get the $9 million deduction. Is that accurate?
Tyler: You actually get the $10 million deduction, but it costs you the million dollars to be able to. Kind of a high multiple in your audit technique, that multiple is not going to qualify.
Toby: Then because it’s over $5000, you got to have a qualified appraisal. I think that’s where we get into trouble. Do you want to explain Mar a Lago? That’s always a fun one. Donald Trump’s done this on his golf courses.
Tyler: He’s also famous for using them too. Ranches all over in Montana, Colorado and places that is just secured. Granted when those guys were doing it, it was a wealthier individual type strategy. It is what it is and nobody’s going to go back.
Statue limitations exist for those types of things. I could tell you right now, maybe the development that they’re due at Mar a Lago and things that would not fly with the IRS or that type of deduction would not.
Toby: They’re contesting a lot of the appraisals and they were really attacking. They’ve ultimately lost this, by the way. My understanding is that they were doing the Chevron where the federal government is able to say, here’s my policy, and then they also had I believe it was Regs that they said they didn’t go through the proper steps, but they were requiring certain language in a deed in perpetuity and they were denying deductions based off of the lack of that language.
Tyler: What they were doing is creating a legal battle on little things and basically exhausting audit funds and investor interest forcing them to find a resolution or to settle some sort of audit case. That case, what you’re talking about specifically, I think the IRS did lose and now they have to have some relevant purpose towards value and other aspects of audit in order to venture into a deal.
Toby: They could still go after the bad guys. Let’s set the table here. The proper use of a conservation easement, because you’ve been doing this a long time, what was the proper use and why were investors doing them?
Tyler: Specifics, let’s set some ground rules here. If we’re going to talk about audit and audit technique and maybe IRS avoidance tax and avoidance of audit, there’s a few steps that I always suggest people look at who do the strategy.
One is obviously for conservation purposes. What is the true purpose? Where does this land lie? What’s the location? Are we in a highly developing area? Are we really trying to preserve the watershed? Are we really trying to preserve some sort of access to trails or is it just the last remaining piece in this fully developed neighborhood that would ruin the beauty or whatever. What is the purpose?
The second one would be timing. Can this land be developed today? Because essentially you’re looking for a deduction that happened this year, 2024. If you invest in something, Toby, and it’s not going to be developed for five years, why are you investing in it? Because you’re basically just ruining your cash flow or your liquidity yourself.
I tend to look at it like that. People want easy returns and so timing. If something’s not going to be developed or in danger of development for 15 years or 10 years or something like that, I don’t think that’s what they meant by preserving today. Let’s save that for tomorrow.
Then obviously value. What do you see in the value? Is it surrounded by homes? I always use the example of Central Park. No idea if Central Park is a true conservation or not. Maybe it is. But I should look that up one day because I use the example like just take an example of Central Park. What is it’s worth to the state of New York or just in the city itself.
But if somebody could develop something on it, look around. It’s literally right across the street, office buildings, parking garages, homes, condos, and things like that. That’s what we’re talking about.
We’re not talking about something that exists states away or you’re trying to compare a development that hasn’t been done. Like I said, it kind of goes along with location, and purpose is what’s around it.
We’ve done 4th phases of developments. We’ve done highly developing areas and year after year, we’ve remained in the same spot because of the, the purpose of, of that development and the conservations there. Those three things right there, I think, is what you’re looking for as an investor in a conservation.
Toby: You’re doing it, you’re going to get a tax deduction, but you’re doing it for conservation not just because of the tax deduction. Because tax deductions can be based on the appraisal and the IRS has been contesting these. Let’s just be straight up. Is that there’s some bad actors out there where they were just doing ridiculously high valuation.
If an investor put in a dollar, they were getting a $15 deduction, which is just crazy. The IRS has now come out and said the maximum amount you can get is 2.5 times of the base. If you put a bug in.
Tyler: [inaudible 00:11:52] has clarity towards rules, typically it was towards audit and you had to follow audits and guides of what the IRS was making rules on or defining as they went which is not a bad thing.
Let’s just remind, people were creating plans in the middle of nowhere and taking really cheap things and making significant deductions, that’s not fair. That’s not the purpose of the law as what you have said. The IRS is working for something that has some sort of value in the place that it’s in. When they are looking at that, they’re chasing the bad actors for those purposes in general.
Toby: The limitations, two and a half times the basis.
Tyler: What we’re getting to is the two time limitation is. Now, we have some clarity. The IRS, like I said, was auditing and then we were following the audits, but then the Inflation Reduction Act came out and they successfully changed rules.
That change came from a two and a half times limitation of true conservation efforts, which matched what the tax break was. If you’re talking two and a half times your investment and you’re pretty much exchanging tax for conservation, which is a great purpose in general.
They did leave a couple of doors open for us and for people that actually wanted to do it correctly and that clarity exists in three purposes. You can bypass that two and a half times limitation if you’re a closely held family partnership. Like I always say, think Yellowstone, think family farms, think people like that.
Toby: You’re conserving your own property. I own property and I see this thing where they say hey, two and a half times limitation of basis for conservation easement. That’s out the door if it’s your property. You could still do a conservation easement.
Tyler: [inaudible 00:13:56] brothers. That’s a group effort. It’s our farm. Our grandpa left us this, we’re all part of this LLC. It makes money. You’re a lawyer. I’m an accountant. We have this passive thing going on. We’re trying to mitigate this extra stuff that’s going on. That’s the group aspect of family.
Then the second one was more of what you’re talking about, the individual aspect. I own a piece of land. I’ve been a farmer for years. It’s just me. I’ve owned this land for more than three years. Now I can create some sort of conservation on that land to be able to help what I’m doing because I’m holding a purpose in America and preserving my land and my rights and leaving things for legacy is what I want to do because my largest asset is land. That’s more of the individual aspect.
Then the third aspect, I think they left open for the public, but also created a good purpose and a good niche for that. It has to contain some sort of historic aspect and there’s qualifications for historic and the main qualification that you should be concerned of is national registry.
Is it on a national registry? Is that property on a national registry? When they say they created a good niche is because not a whole lot of historic properties now continue to hold significant development value. Those properties are few and far between.
Toby: We’re talking museums and stuff like you have a historical house that was owned by somebody of prominence and it’s being maintained. They make it into a museum. Now, you could syndicate that and you could preserve it and operate it and you’re going to get a deduction based on it.
Tyler: Be a part of that and it’s something that may or may not be on the registry or something that has maybe the buildings on registry, but the land attached to it isn’t. It lands on the registry, but it doesn’t have any building restrictions, just the for set structure.
That preservation of the historics of America now comes into play. I think they created a good purpose. They defined some rules. They created limitations to where not everybody can participate because it is difficult. When you talk about barriers to entry and things like that, it does take some significant research and those types of knowledge to be able to obtain this stuff.
They’ve really secluded that bypass of the two and a half times. Otherwise, just take your two and a half times. There’s nothing wrong with that. I mean, you’re going to conserve a property and you’re not going to pay tax, but you’re also going to contribute the same amount that you would pay tax. There’s nothing wrong with that. There are plenty of people doing that and you will be thankful for them.
Toby: There’s an incentive. Somebody who’s let’s say I make a million a year and I’m in a high tax state. I may be paying 45%–50% percent tax. If I can donate a dollar and get probably four to five times the deduction, is that about right?
Tyler: Yeah. Keeping it between the fours.
Toby: Let’s just say closer to four. I feel comfortable.
Tyler: A normal real estate return because it is what it is, a real estate deal. You and I choose to then concern ourselves. We have looked at this as development. We know that we can make four times our money. We also know that value can come back to us in a deduction. Let’s use this property here to mitigate taxes.
Toby: Let’s use numbers. Let’s just say I get a dollar and I get a $3 deduction and that $3 deduction for each dollar that I’m able to reduce is saving me 50¢. Saving me $1.50. A $1 is saving me 50¢. I’m spending $1, I’m getting back $1.50.
I get a little bit of benefit, but the real thing that we’re doing here is conserving historical properties. That legal niche, otherwise it’s two and a half times. If I had the same scenario, I would make a dollar. I’m going to get a $2.50 cent deduction. It still may be worth it.
But a lot of people are saying, man, there’s a risk. The IRS has been hammering these things and I don’t want to take that risk, and I get it. Again, you may not be in a high tax state. You may be in a state where they don’t recognize the deduction. You may be looking at 37% federal or maybe you’re in a lower bracket.
You’re 32% federal and you’re alright, it doesn’t really matter. I just want to conserve. It’s really not making any benefit for me. Are there things that I could invest in to help preserve space or to preserve land without costing me a whole bunch? Maybe I get some benefit.
Tyler: Like you said, I think that is a good example of somebody that makes a million dollars. You can go up to 50% of that million dollars. Okay. Let’s say I’m a doctor and I’m making a million dollars or close to it. I don’t have a whole lot of options for deductions. I began to look at real estate.
I look at some other things, but the significance and savings isn’t there, but my wealth grows with my real estate. I also want to contribute to something of meaning so I contribute to a historical conservation easement. Let’s say I’m in a high tax state, California or whatever, my highest tax bracket with state is 50%. All of that $500,000, I get a four to one. I’m going to contribute $125,000 to LLC, this real estate deal.
Seeing the development potential knowing that I can get a four to one for my money. They put a vote out that says hey do you want to conserve or do you want to develop? And I want to conserve. I make money doing something else. I don’t want to make more money. I’m looking for a tax break.
Sure. I want to conserve. Now I’m getting a $500,000 deduction and I should have paid $250 on this money, essentially. I paid $125 to the investment but I should have paid the IRS $250. Now I’ve saved $25,000.
Hopefully with that, now I can venture into real estate and go with some liquidity and things like that. It doesn’t go without saying that this doesn’t have ripple effects for people that are saving money that continues to reinvest in America.
I think that distinction sometimes is people are getting a tax deduction, but you don’t realize when people get some sort of tax deduction, you’re reinvesting somewhere else. Even if you were to give a dollar for dollar charitable donation, you’re investing in a church, you’re investing in a Salvation Army, you’re doing something with that money that is helping other people.
Toby: I think that’s the point where we lost it there. In 2015, they switched it and they made it up to 50% of adjusted gross income and it became such a large tax play. I’m guilty of this. I would talk about it every year as big in your tax toolbox of things that you could deploy by the end of the year to do.
Tyler: I think our first podcast was 2016 and we spoke of some things that are no longer.
Toby: The IRS said we hate it. They attacked it. Congress changed the law and said, because there were so many bad actors. I never saw a deal that was crazy. I think the biggest one I saw was four and a half to one or something with some of the people.
Tyler: I saw eight to one, it’s an eight to one. I have people right now that I speak to. About conservations that are still interested in the strategy, but are dealing with the consequences of those investments back then. They’re not kind and we’re talking seven years later, we’re 2024, and you and I are speaking of a period of abuse before the IRS began to attack these things and made people wary of them.
Seven years later, now these people are realizing consequences for a decision they made back then. That’s the breaks of this. Once an audit’s open, it’s open and unless there’s some sort of settlement or some sort of agreement, you kind of have this looming over your head. The IRS is not looking, I don’t want to say what they’re looking for or not looking for, but the easiest thing to do for investors and the IRS is to settle because ultimately, the labor, these things.
Toby: They were attacking the valuations almost always. I think that they still have grounds to do that.
Tyler: It’s just [inaudible 00:23:02] attack purpose and that’s where they win. You took a piece of land in the middle of nowhere, Georgia, and claimed some sort of astronomical value. There’s not even a road or water to this property or the value you are claiming which are mineral type rights, which the IRS now defines in the new IRC as invaluable. The mineral rights that people were claiming there weren’t even mineral rights.
There wasn’t even the threat of mining in the specific county or even the state that they were preserving in. The valuation was maybe two or three states away. This type of mine exists in Alabama. It’s not really in Georgia. True purpose, what was the conservation of that property?
Toby: They were just playing a game. That was just pure tax play. They didn’t have any substance. You saw those and rightfully showed they should be torn apart.
Tyler: But people didn’t know. That was what the market gave them and they invested and they didn’t know, they didn’t do their due diligence and now due diligence is very much encouraged. Like I said, if you can’t see value across the street or you can’t find value within a mile of the property that you’re looking at, then neither can the IRS, the IRS can’t see the purpose either then. That’s really a due diligence item that somebody should be [inaudible 00:24:311].
Toby: But a true conservation easement still works. There’s a limit. The historical preservation has no limit and it still works. Conservation easements for private individuals still work without a limit so long as they’re meeting the requirements underneath the tax.
Tyler, if somebody’s interested in talking to you about this. All I can talk about is the tax strategy. I can just say, hey, here’s the tax benefits. You can give to charity and give to conservation easement. It’s up to you, but the whole point of both of those is the purpose of it. You have to have a charitable or conservation purpose. There are tax incentives there for individuals. How would they get a hold of you? I mean, can I just put your link in the show notes?
Tyler: [inaudible 00:25:18] that’s how open I am in thinking that this strategy does work if it’s done correctly. (719) 580-3051, you’re welcome to call or text me. My email address is tsurat@onetreeadvisors.com.
Toby: I’ll put it in the show notes.
Tyler: Put it on the show notes. It’s something that is very individual based. You do have to understand the strategy. You do have to meet certain requirements. It doesn’t make sense for everybody. There still is a risk. IRS, even today, the statute of limitations is three years and they’re still interested in looking for something that makes sense to them. That’s their job.
But most definitely the new rules have helped them mitigate the fact that they have to look at everybody because they do have some, and now looking at something of significance is their goal and rightfully so. I’ve always said that I always believe that people who do things wrong should [inaudible 00:26:36] in the areas that they do things wrong.
Toby: They were going after some good deals though too. They were trying to find a technical reason. Oh, you didn’t put this magic language in that we just decided after the fact that you need to have it now. Now they’re being told, no, that doesn’t work so they’re going to have to go back and look at those claims again. They can’t just get rid of them.
If somebody wants to get ahold of Tyler, you can absolutely do so. Reach out under there. Also, if you want to share this with anybody that’s been doing conservation easements or they’re wondering what’s going on. This is an easy 20 some minutes explanation of what’s going on and I know that it’s not the simplest code provision or to get your mind around.
But I think you break it down pretty easily, Tyler and then it’s fact specific. If somebody wants to reach out to you and have you look at their scenario, then I’m sure that [inaudible 00:27:33]
Tyler: Yeah, it’s very deal specific. It’s very personal and specific. Not taken lightly. There’s still people doing it wrong. There’s still people doing it right. I’m open and welcome to look at the things you’re looking at and maybe suggest some other things that you should be looking at.
We all make that mistake, but you shouldn’t be punished because you’ve trusted somebody. Just 10 more minutes or an hour long or something does make sense in this type of strategy to be able to look into it a little bit more and a little bit harder.
But one, it’s still in the tax code. It is still legal. You have a 50% deduction, whether you give it dollar for dollar or $4 to a dollar, whatever you do is still legal.
It does sound a lot but there are ways to get that 50% without doing dollar for dollar. Many many strategies along the way. You also shouldn’t be punished for making a lot of money and there is a fair share of taxes. I’ll tell you that directly. There’s only so many strategies that make sense and then they don’t. They won’t make sense because your tax brackets are better than your strategy.
Toby: It’s going in with your eyes open and making sure that you’re making intelligent decisions based on the full understanding of what it is that you’re doing. That’s why you talk to a guy like Tyler, rather than just go straight to a promoter who’s going to say invest in this is what you’re going to get.
No, they always say, talk to your tax advisor. Here’s why. Because you want to have somebody that does it. I don’t do it day in and day out. Tyler lives this, breathes it, eats it.
Tyler: Like I said, we’re just a little bit more active. We work with people, CPAs, or whatever, and understanding a strategy or understanding a certain deal. It’s just something you got to be comfortable with. More than open to do that and happy to do that. Love doing that actually. If I can’t fill my day with golf, I would rather talk to people about tax mitigation, believe that or not.
Toby: Alright, Tyler. Perfect. Like, subscribe guys. Share this with anybody if you think you will benefit.
