John Mark was an established real estate investor I worked with, who enjoyed hunting & fishing in his spare time. John Mark bought a small farm for his primary home so he could step right outside his door and get right to his favorite hobbies, and enjoy them with his kids.
As time went by, the family farm grew into a place with many happy memories, and John would not have dreamed of turning his farm into anything but the peaceful farm & woodland that it currently was.
As John neared retirement he was approached by a conservation trust about putting a conservation easement on his farm. They offered to pay him on a per-acre basis in exchange for a perpetual easement that would prohibit any future development or changes to the land.
Along with the payment also came the option of a tax deduction, which was the difference between the value that John could have sold for to a developer, and the amount he received for the easement.
Let’s look at the mechanics of this to see where John was able to uncover some value in his property, while meeting his goal of preservation.
What You’re Actually Selling – What They Pay
A conservation easement isn’t a donation of land. It’s a donation of rights — specifically, the right to develop, subdivide, or alter a piece of real property, which the owner permanently signs away to a qualified land trust or government entity while retaining title.
- Under Internal Revenue Code Section 170(h), the contribution must be a “qualified real property interest,” granted in perpetuity, to a qualified organization, and made exclusively for a recognized conservation purpose: outdoor recreation or education, protection of a relatively natural habitat, preservation of open space consistent with government policy, or preservation of a historically significant land area or certified historic structure.
- Usually this means the landowner will need to consult with the conservation organization they have donated to before they can alter their property. One client we had, for example, wanted to put up a small array of solar panels (personal use) on the property.
Another property owner wanted to build another barn on the property to store farm equipment, which the organization had limited to no more than 3 in the easement documents.
- The easement will be put onto certain sections of the land, usually leaving out any farmhouse and some structures that may already exist on the site, or perhaps some acreage that the owner may want to set aside for future personal use, like building a house for family.
- What a conservation organization can actually pay for the easement varies widely depending on what county the parcel is located in and the resources available. Oftentimes in more highly populated regions, the conservation organizations may have fewer properties that desire to be under conservation and subsequently have more funds available for the few that are interested. In our experience, we have seen this range from $500–$2,000 per acre.
The Conservation Easement Tax Deduction
In addition to the payments that may be offered for conservation, there may also be a federal tax deduction available.
The deduction is calculated as the difference between the property’s fair market value before the restriction and its fair market value after — in other words, the value of the development rights you just gave up, less conservation payments. On raw land with strong development upside, that spread can be substantial.
Example: John’s 50-Acre Farm
- John’s 50-acre farm was worth $40,000 per acre without any easement.
- John decided to place 40 acres in easement, which would be a value of $1.6M.
- The conservation organization offered him $2,000 per acre to place an easement on 40 acres of the parcel ($80,000).
- The value of the 40 acres with the easement decreased to $30,000 per acre, $1.2M total.
- The difference in value ($1.6M – $1.2M) was $400,000, minus the conservation payment of $80,000. This was a net $320,000 deduction for John based on the reduced value donated into conservation.
- A qualified appraisal is mandatory and must be completed within a window bracketing the filing of the return.
- For individual taxpayers, a conservation easement donation is deductible up to 50% of adjusted gross income in the year of the gift. Qualified farmers and ranchers get an even more generous 100%-of-AGI limit.
- Whatever isn’t used in the donation year carries forward for fifteen years, which gives investors real flexibility to time the deduction against a large capital gain, a business sale, or another high-income year rather than losing the benefit to an AGI ceiling. (For more ways to offset gains, see our guide to real estate tax savings every investor should know.)
- Several states layer a second benefit on top of the federal deduction: Colorado, Virginia, Georgia, and South Carolina, among others, offer state conservation tax credits, and in some of these states the credit is transferable — meaning an investor who doesn’t need it can sell it to another taxpayer for cash.
How This Affects Future Value
The obvious use case — placing easements on a farm — isn’t where most multifamily investors will find opportunity. The more relevant uses look like this:
- Buffer and excess land on larger parcels. Investors assembling land for a phased multifamily or mixed-use development often end up holding wetlands, floodplain, steep slope, or setback acreage that can’t be built on anyway (see the multifamily land development approval process).
Placing a conservation easement on that unusable portion converts dead weight into a deduction, and it can also reduce the property’s overall assessed value for ongoing property tax purposes, since the easement is recorded against the parcel.
- Historic building facades. Adaptive reuse of a certified historic structure into apartments or commercial space is already a favored strategy for investors chasing the Historic Tax Credit. A facade easement — donating the right to alter the building’s exterior — can be layered on top of that credit, though it comes with its own compliance regime: the entire exterior must be preserved, the land trust must approve future alterations, and Congress added a filing fee and additional documentation requirements specifically to curb abuse in this category. Done properly, though, it’s a genuine second benefit on a project you were already structuring for historic credits. (Related: five keys to making money in historic districts.)
- Land banking. Investors sitting on large peripheral holdings around a growing metro sometimes find that placing a portion under easement locks in today’s tax benefit while they wait years for entitlements or infrastructure to catch up to the developable portion. The easement doesn’t have to cover the whole tract — a partial-parcel strategy is common and IRS-sanctioned when structured correctly.
The Part You Cannot Skip: Why the IRS Is Watching Closely
Conservation easements have a reputation problem, and it’s earned. For over a decade, promoters ran “syndicated conservation easement” deals — pooling investors into a partnership that bought land cheap, obtained an inflated appraisal, donated an easement, and passed through a deduction worth four, six, sometimes ten times what investors put in.
- The IRS has listed these on its “Dirty Dozen” tax scam list for years running, and penalties for participants have included a 40% gross valuation misstatement penalty on top of promoter penalties and, in the worst cases, criminal referral.
- Congress responded directly. As part of the SECURE 2.0 Act, IRC Section 170(h)(7) now disallows a conservation easement deduction claimed by a partnership or S corporation if the deduction exceeds 2.5 times the sum of each partner’s or shareholder’s basis in the entity — which is precisely the ratio abusive syndications relied on.
There are real exceptions: the limitation doesn’t apply if the property was held at least three years before the contribution, if it’s a family-controlled pass-through entity meeting specific ownership tests, or if the contribution preserves a certified historic structure. But the rule means the old syndication playbook — buy land, mark it up on paper, donate, and walk away with a deduction many multiples of your investment — is largely closed off for anything acquired or restructured recently.
The practical lesson for an investor evaluating this strategy: if anyone pitches a conservation easement deal where the promised deduction is several times your cash investment, treat that as a red flag rather than a selling point.
The transactions that hold up under audit are the ones where the appraisal reflects genuine, defensible development value that existed before the restriction — not manufactured value that appeared the moment a promoter got involved.
How to Actually Do This
The workable version of this strategy starts with land or a building you already own or are acquiring for legitimate investment or development reasons — not a syndicated shell built around the tax benefit.
From there: get a qualified, independent appraiser with easement experience to establish before-and-after value; work with an established land trust or government conservation agency willing to accept and enforce the easement in perpetuity, since the IRS scrutinizes the donee’s capacity to enforce the restriction as closely as the valuation itself; involve a tax attorney or CPA with specific 170(h) experience before closing, not after; and check whether your state offers a transferable credit.
Used this way, a conservation easement isn’t a loophole — it’s a recognition that land you can’t or won’t develop still has value, and the tax code offers a legitimate way to realize part of that value now rather than never. For investors holding buffer parcels, historic buildings, or long-horizon land positions, it’s worth a conversation with your tax advisor.
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This article is provided for general informational purposes and does not constitute tax or legal advice. Consult a qualified tax attorney or CPA before pursuing a conservation easement transaction. Clear Multifamily does not advise on conservation easements; this article is only sharing our client’s experience to benefit other investors.
Sources:
- Conservation easements | Internal Revenue Service
- Conservation Easement Deductions – A Primer on Key Provisions | Freeman Law
- How Real Estate Investors Save Thousands with Conservation Easement Tax Deductions | Uncle Kam
- Conservation Contribution Disallowance Rule: Implications to Consider | Forvis Mazars US
- Congress Passes the Charitable Conservation Easement Program Integrity Act | Kaplan Kirsch LLP
- Conservation easements: How they work and why the IRS cracked down | CNBC
