The Impact of the Omnibus Bill on Conservation Easements

With the Omnibus bill in effect, there’s now more regulation surrounding the use of these multiples in syndicated land conservation easements. The multiple is now capped at 2.5X. Let’s break that down with an example: Suppose someone has an adjusted gross income of $1 million and uses one of these easements. Previously, with a 5X multiple, they could have significantly reduced their taxable income. But now, with the cap at 2.5X, they’d need to invest $100,000 to create a $250,000 deduction.

This means they could lower their adjusted gross income from $1 million to $750,000. While that’s still a substantial reduction, it might not be as appealing. That $250,000 deduction could translate to a tax savings of about $125,000—assuming the tax rate is roughly 50 cents on the dollar. However, considering they spent $100,000 to achieve this, the net benefit is only $25,000. This marginal gain might not justify the investment unless they’re doing it out of a genuine desire to support environmental causes.

So, the question remains: Is it really worth it? Has the Omnibus bill killed this strategy?

Navigating the New Landscape: Strategies and Insights

I’m going to walk you through some insights I’ve gathered from reliable sources, who prefer to stay anonymous. Remember, none of this should be taken as tax or legal advice. If you’re considering these strategies, make sure you’re working with the right professionals.

This is why people join our mastermind group—to get personalized advice. Not every strategy will be right for everyone, but if your adjusted gross income is over $400,000 or $500,000, it’s definitely worth learning more.

In the past, you could be in a deal for just one year before making an election to donate through a syndication. But with the new Omnibus ruling, you now need to hold the investment for three years. This seems arbitrary, possibly aiming to mimic the treatment of long-term capital gains. But like it or not, three years is the rule now.

Another key change is the cap on multipliers. Previously, people used to claim deductions with multipliers as high as 5X or even 20X the original investment. Now, anything above 2.5X risks invalidating the entire deal. While this information is from my notes and not guaranteed to reflect actual enforcement, it’s important to be cautious.

For those who participated in conservation easements before the Omnibus bill passed in December 2022, you might be safe under the old rules. However, some may be tempted to backdate documents, which I don’t condone at all, though it’s something that could happen.

The Omnibus bill is strict, but with a new IRS commissioner, we don’t yet know how aggressively these rules will be enforced. Historically, deals with substantial legal budgets have managed to settle rather than go to full litigation. The hope is that if you can afford to fight, you might still come out ahead.

If you’re considering these strategies, it’s worth evaluating whether the risk is worth the reward. Sometimes, other options, like taking advantage of real estate professional status and passive activity losses, might be safer and more effective.

Finally, remember the original purpose of conservation easements: preserving land for the environment. While the Omnibus bill has made it harder for these deals to go through, there’s a possibility that regulations might ease in the future if not enough land is being conserved.

In the meantime, consider safer alternatives like the Tax PAL Fund, which I’ll cover at the end of this video, as a way to achieve passive losses without the same level of risk.

Exploring Alternatives: Fee Simple Conservation Easements and Tax Mitigation Strategies

That loophole that I’m getting at is, right now there are regular conservation easements and fee simple conservation easements.

Regular conservation easements, the rights are given up. The land is not really donated. And those are more the traditional conservation easements that I think a lot of us are used to. In years prior. And you are able to, in these syndicated deals, you can use the benefits up to 50 percent of your adjusted gross income.

So if your net, if your adjusted gross income was 1 million a year, you could buy up all these conservation easements yet it may be only at a 2x rate. It’s 2. 5x multiple nowadays, we don’t know yet, but you can drive it down to 50%. The other method is this fee simple, which may not be under the Omnibus jurisdiction, and I’ll explain why later.

But what they’re saying is you can possibly still use these fee simple type of arrangements where the land is completely given up. It’s not just a right, but it’s a right. It’s be simple, just donate it and give it away. The downside to this is instead of a 50 percent ability to lower your AGI, you’re only limited to 30%, which may be good enough.

And what I would probably recommend most people to do is you see your tax mitigation strategy not as just a one trick pony with conservation easements, for example, but to use a conjunction of different mitigation strategies. And this kind of actually forces you to do that, because at 30 percent maximized use of this, what’s happening is, say, take that guy who has a million dollars adjusted gross income.

30 percent of it means that he’s only able to go from 1, And if you’ve seen our tax videos in the past, I always try to get people around 340,000 married file jointly, or maybe even around 200,000 AGI. So obviously if this guy is at 700,000 right now, there’s a lot of room of improvement here. And there, maybe they implement real estate professional status, or they have a lot of passive income, and they use the passive losses, which again, we’ll talk about here at the end of the video, but they use those passive losses that drop them from 700,000.

Back to 300 or 400 or wherever they really want to follow that particular year Again using conservation easements, but again this fee simple conservation easements And when I started to first hear this I was like I thought the omnibus bill was calling out all conservation syndicated conservation easements as a whole And to me this was a head scratcher I personally don’t do the conservation easements, but I know a lot of my clients use them every single year You Which is why it’s important to get around other people actually doing this type of stuff.

Because if you Google this stuff on your own, you’re going to find all the content marketers who are posing as CPAs. That want to put out a puff piece like this to make them seem really conservative. So most people will go to them, but there are a lot of aggressive folks out there that are investing in the right things that the IRS wants, that wants to mitigate their taxes as much as possible, legally possible, who are looking for the opposite.

Where is this little crevice that lawyers can get in here and break up the whole Omnibus thing? It seems strange and stupid. I think it’s a little stupid. But, the way it was written into Omnibus bill, it doesn’t specifically call out the whole nuance between free, simple, and regular conservation easements.

So again, where does this lead into? It leads into when the conservation easement deal is being audited, it will eventually go into this audit. And this is where this is, this lawyer, we pay lawyers to do this stuff. And, if anybody has done silly things for some legal reason, no, and laugh, this is the reason why we have lawyers.

And thus, Conservation easements may not be dead, but in my opinion at the very least, you can’t use that 50 percent. You had to go with the fee simple and do the 30 percent is what I’m thinking and maybe that two and a half multiple lies. Again, I don’t know. I just personally think it’s just better to use passive activity losses to lower your passive completely and to dwindle your ordinary income amount over time.

To do this, you’re going to need to get rid of your traditional investments and get into alternative investments that give you passive activity losses and to do this a very old fashioned and clean way without having to use conservation easements. To me, conservation easements are like a wonder drug, whereas using passive activity losses to offset passive income to cancel that out.

And, or maybe to use a conjunction into real estate professional status to use your passive losses to lower your AGI at that point. That’s very basic stuff and that’s like good diet and exercise in a way instead of just using the magic wonder pill. But however you guys want to do it, right? And I think this is really gets into your own personal situation and your own risk tolerance.

You have with this type of stuff. I’ve been very clear. I’m not giving tax or legal advice but I think this is where you need to have a group of community around you and that’s why we always you know Have these events where people get to see each other face to face and talk about things like this instead of just googling stuff amongst the masses Now I mentioned, how do you get these passive activity loss?

Which I feel is a lot better way of mitigating taxes good old fashioned passive activity losses depreciation to knock out your passive income If you’re somebody who has moved off of your w 2 job your business your ordinary income Now all your income is passive income and therefore you could drive your income down to none.

That’s like how I live personally I pretty much just have passive income these days and I’m able to use the massive amount of losses I get from real estate to knock it out and therefore my adjusted gross income is pretty much nothing No taxes, completely legal.

Introducing the TaxPile Fund: A Game Changer for Investors

Right now, there are two types of conservation easements: regular and fee simple. Regular conservation easements involve giving up certain rights without fully donating the land, which is what many are familiar with. Historically, in syndicated deals, you could use the benefits of these easements to offset up to 50% of your adjusted gross income (AGI). For example, if your AGI was $1 million, you could buy conservation easements and reduce it by up to 50%, though the multiplier is now capped at 2.5X.

Fee simple easements, where the land is fully donated, MIGHT (we really don’t know this because of sparse case law) not fall under the Omnibus jurisdiction. However, they only allow you to offset 30% of your AGI. While this might still be beneficial, it forces you to diversify your tax mitigation strategies rather than relying solely on conservation easements.

For example, if someone with a $1 million AGI can only reduce it by 30% using fee simple easements, they might still need other strategies, like real estate professional status or passive losses, to further lower their AGI.

It’s crucial to understand that the Omnibus bill doesn’t explicitly address the difference between regular and fee simple easements, which could create legal opportunities. However, this also means that conservation easements might not be dead, but their use is more restricted.

Given these changes, it might be wiser to focus on more traditional strategies, like using passive activity losses to offset income. The Tax PAL Fund we offer allows investors to gain passive activity losses without the need to recapture them upon asset sale, unlike other methods. This can be a game changer, especially with the gradual phase-out of bonus depreciation.