By Bob Lord, and Chuck Collins
The New York Times’s report on Donald Trump’s taxes was rich with detail, including allegations of massive deductions for the president’s business losses, $70,000 worth of hair styling. and high-end consulting fees for his own daughter.
One less-known item was the president’s use of obscure donations called conservation easements. Those easements may be the most emblematic part of how America’s tax system favors the ultrarich.
And, as the Washington Post reports , they may form the basis of “one of the most consequential investigations facing President Trump as he heads into the election.”
In a conservation easement, a property owner donates development rights on a piece of land to a public agency or qualified charity, usually a land conservancy. The donor retains ownership of the land but contributes its “development value” in perpetuity. This is supposed to ensure that the land is preserved for the general public or to protect wildlife.
In one example, Trump donated the development rights to land surrounding his mansion in Westchester County, N.Y., to a land conservancy. This prohibited future development on the property, netting Trump a $21.1 million charitable tax benefit.
According to the report on Trump’s tax returns, $119.3 million of his $130 million in charitable deductions took the form of conservation easements such as these. That’s not money Trump spent feeding the hungry or housing the homeless. Instead, it created buffer zones around his private property, increasing both its value and his own privacy.
Trump is hardly alone in using this technique. In 2014, 3,249 wealthy taxpayers claimed $3.2 billion in charitable deductions for conservation easements. And the practice is rife with abuse.
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One form of abuse is the overvaluation of the donated development rights. The donors have an incentive to get as high an appraisal as possible, in order to increase the size of the charitable gift and the deduction. As a result, they often overestimate the value of their gift.
In Trump’s case, he valued his Westchester County property at over $56 million despite having purchased it, together with a 60-room mansion not subject to the easement, for just $7.5 million. The state of New York is now investigating that valuation, along with other properties where Trump has donated conservation easements.
Another problem is that easements typically are created on land that was never going to be developed in the first place. And in many cases, the restricted land has no obvious public use or access.
Conservation easements are increasingly marketed by wealth managers. They have created a new investment product called a “ syndicated conservation easement ,” where investors can get a share of the tax benefits from conservation easements donated in connection with large development projects.
In 2017, the IRS sounded the alarm about these schemes, classifying them as “ listed transactions ,” a designation for potential abusive tax-avoidance transactions. Taxpayers who engage in listed transactions must disclose them on their returns (a red flag for an audit) or face a penalty of 75% of the tax they tried to avoid.
This was a welcome development. But even here, tax law still coddles the ultrarich in two ways.
First, taxpayers who invest in syndicated conservation easement deals, while typically rich, are usually not in the same league as billionaires who donate easements on their own golf courses. Second, penalties for failing to disclose listed transactions are capped at $100,000. That could be a huge disincentive for a moderately wealthy investor at the $100,000 level, but it’s trivial for a billionaire claiming tax benefits of $10 million.
None of this is meant to cast doubt on the excellent work many responsible land conservancies do. But we should be concerned about the potential for abuse in the donation of easements where donors retain an economic interest.
These problems could be fixed easily.
First, the charitable deduction for conservation easements should be eliminated. If a wealthy landowner truly wants to benefit a land conservancy or other charity, he or she can contribute the entire property. Second, the rules should be amended to eliminate the cap on the penalty for failing to disclose a listed transaction on a tax return.
While the tax scheme here is complicated, the legislative solutions are simple. Conservation easements are just another way that Trump’s now well-documented alleged tax abuse provides a road map for reform .
Bob Lord is an associate fellow at the Institute for Policy Studies and a practicing tax attorney in Phoenix. Chuck Collins directs the Program on Inequality at the Institute for Policy Studies and co-edits Inequality.org.