Golf Course Conservation Easements & the new Tax Bill

Several times this week, I received calls inquiring about the impact of the new proposed tax bill on golf courses.  The area most seem to focus on are conservation easements.  Depending on the source of the news, the tax benefit afforded to golf courses, clubs and their owners is either a “loophole”, the “Trump Golf-Course Break”, or simply a deduction in the interest of open-space conservation.

The issue of conservation easements arose during Donald Trump’s campaign when news emerged that he might be claiming tax deductions for property on some of his golf courses and estates, including his Mar-a-Lago complex in Palm Beach, Fla.

Regardless of the political implications, the new tax bill appears to preserve the potential for significant income tax deductions for golf course owners for open space conservation easements for those who qualify.  According to “Accounting Today” Section 170(e)(1) of the Tax Code allows a deduction for a qualified conservation contribution, which is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. The contribution should include a restriction, granted in perpetuity, on the use that can be made of the real property. The IRS and the Treasury Department said they have targeted some promoters are syndicating conservation easement transactions that offer the opportunity to obtain charitable contribution deductions in amounts that significantly exceed the amount invested. In those transactions, a promoter offers prospective investors in a partnership or other pass-through entity the possibility of a charitable contribution deduction for donation of a conservation easement.

In late December, 2016 the IRS alerted taxpayers that certain syndicated conservation easement transactions would be considered tax avoidance transactions. The IRS warned the transactions, and substantially similar transactions, would be considered “listed transactions,” or akin to tax shelters.

In May, 2017 the IRS issued a new notice informing them they would have more time to file the disclosures required by last December’s notice extending the due date for participants filing disclosures.

While this news is encouraging to the conservation community and potentially golf course owners, it doesn’t appear to change the existing rules, but rather loosen the crackdown that had been in place on conservation easements.  There was talk previously of specifically excluding golf courses, which appear to be protected in the new tax bill.

Nevertheless, it is still critical to understand that proper valuations are required, which include a thorough highest and best use analysis, “before” and “after” values and most importantly sound feasibility analysis, especially for the “before” (the easement) highest and best use.  It is likely that the IRS will continue to scrutinize appraisals done for conservation easements and ensure that they are done in accordance with federal land acquisition (“Yellow Book”) standards, and that unsupported highest and best use conclusions will be challenged.

What this means for golf courses is simply that if your property has an alternative highest and best use (say, residential development) and you choose to keep it as a golf course in perpetuity by donating a conservation easement to a qualified trust, you would be entitled to a deduction for the difference in value between the golf course use and the highest and best use – as you previously were.  There is seemingly no difference there except that overly aggressive enforcement might be relaxed and that golf courses are now specifically protected as being eligible, when they qualify.

It should be clearly understood that conservation easement transactions are complex and expensive.  They require experienced and knowledgeable legal counsel, engineering and valuation expertise.  Most of all, they require that the donor of the easement actually be giving something up.  Just because the zoning may allow for development doesn’t mean that the highest and best use is for development.

Given the calls I’ve received this week, I would urge and advise proceeding with caution, but by all means take advantage if you can.