The Collaborative – Taxes

Conservation easements and opportunity zones can be a great way to reduce your taxes, especially if you’re a high-income earner or deal with the buying and selling of a business or large property.

As we look at and talk about taxes, it is always a hot topic. We recently posted a blog where we discussed taxes and how they’ll be affected after the election. 

Join me as I interview Dustin Jeffords, a tax attorney for Capital Preservation Services.




Michelle Bertram:

Taxes are a topic that is important to all of us. I think a lot of us would agree with Arthur Godfrey when he said that he doesn’t mind paying taxes in America, but he wishes fair share was half the cost. Right? I think we all agree taxes can be high,  so today we’re going to be talking about a couple of unique strategies when it comes to reducing your taxes.


The first strategy we’ll explore applies to anyone who has a consistently high taxable income or at least in this year and next year. This could be for any reason like if you’ve sold or bought something like a business or landing a big sale and your income is going to be higher than normal this year.


This is a strategy that would work whether you’re a business owner or individual and we’re going to have Dustin Jeffers talk about how you could apply the strategy to this year as well as talk about some capital gains.


So why don’t we start with the first strategy, called a conservation easement, where we explore a situation where someone who has a really high income this year and they’re looking at reducing their tax.


Dustin, can you introduce yourself and then tell me a little bit about what that is?

Dustin Jeffords:

My name is Dustin Jeffords and I’m an attorney who works for Capital Preservation Services. We offer Income Tax Planning for business owners. ForW2 earners, we also have a few strategies that we put in place for them. 


Conservation Easements


The first strategy being conservation easement, which can work for W2 employees, as well as business owners. In simple terms, a conservation easement might be utilized if you were to find a piece of property, find the highest and best use of that property, and then we would put easements, or restrictions, on the use of the property, extinguishing those rights, which significantly devalues the price of the land. That devaluation, according to 178 of the tax code, turns it into a charitable tax deduction. So, you’re able to invest in a partnership that owns the property and you get your pro-rata share of that decrease in value as a charitable deduction.


Michelle Bertram:

Okay. So, for example, I own some farmland and I owned it right next to Madison, which is one of the bigger areas in Wisconsin. The Madison area is funny because when you visit Madison there’ll be a cornfield right next to like this big subdivision, right? So, for this example, if I own that land and I put this conservation easement on it, declaring that I’m going to keep this land green and won’t develop it, meaning that it won’t be fully developed versus if I kept the space with some green space and I’m just saying I’m keeping it there. That’s kind of what a conservation easement does. 


I could do it in my own land, but, as you’re saying, and you’re going to mention, there’s a way that we can invest in conservation easements that are already kind of set up. So you don’t have to have the land in order to participate in this, correct?

Dustin Jeffords:

Correct. Yeah, that’s right. When people do that, where they put their own land in a conservation easement, their children may be pretty upset with you because down the road they’re going to lose some money, but you will get the tax benefits on the front end. 


It can be very labor and cost-intensive to put an easement on your own property because there are a lot of engineering studies, appraisals, and legal work behind it to make sure that you’re buttoned up from a compliance standpoint with the IRS. 


A lot of people choose to invest in a partnership that owns a portion of a property that has an easement on it rather than to conserve their own property.

Michelle Bertram:

And so if I were to do that and invest in one of these properties, what’s a typical amount that I would need to invest. In addition to that, what are the average tax benefits for that?

conservation easements and opportunity zones - bertram financial

Dustin Jeffords:

You’re able to offset 50% of your adjusted gross in a conservation easement. 


For instance, if somebody has a $300,000 adjusted gross then they would be able to offset $150,000 worth of income. The conservation easement that we have available currently is a five to one. This means that for every dollar that you invest, you get $5 back in charitable deductions. So, for that person making $300,000 of adjusted gross income, to get the maximum offset of $150,000, they would need to invest $30,000. 


Michelle Bertram:

So a lot of times it’s kind of working backward. By this I mean, you could work forward and say, “Hey, I’m going to invest $20,000 and I have a $100,000 set.” Or, you can work backward and say, “This is what my taxable income is, so how much can I offset? How much can I put into this fund?”


Dustin Jeffords:

Yeah, for the most part, that’s kind of how we get down to the number. We have clients that have questions on how much they should invest and we try to get down pretty close to the maximum amount that they can offset to determine their income for the year. 


After that, we work backward to find what the maximum allowable offset is. The good thing about conservation easements is if you purchase too much, you don’t lose the investment. The investment automatically carries up to 15 years. So it would be very difficult to lose any of the investment in that 15 year period that it carries forward.

Michelle Bertram:

You just read my mind. I was going to ask that next and say, if I can only offset half of it now, the rest of it goes forward into next year, and into the future years? So again, this strategy would be useful for someone with a higher-end income, right? Someone who’s selling something or has a big sale this year. 


Something like selling a business is going to have high income taxes, exiting a company, receiving a large payout, or maybe trying to do some planning and taking an IRA distribution, like trying to do a big rock conversion, anything like that would be an example of someone who is a good candidate for a conservative easement.

Dustin Jeffords:

Yeah, absolutely. We’ve had people in every situation that you just mentioned, who have invested in these conservation easements, whether they have a million-dollar income that they receive every year, they recently sold a business and had a big windfall from that, or maybe they took some money out of a brokerage account or 401k. 


For another example, we’ve had people who have sold a property or business and had a significant amount of recapture depreciation that they had to pay tax on. This allowed them to offset half the taxes that they would have.

Michelle Bertram:

Yes. You just hit another point. For half the taxes they could either write a check to the IRS for “X amount” of dollars and the tax they owe, or, they can write a smaller check, invest in a conservation easement, and then greatly reduce the tax that they would owe to the IRS. Correct?


Dustin Jeffords:

Yeah, absolutely. So basically, if you invest $20,000 that will get you a $100,000 worth of deductions. 


Now let’s say you’re in that highest tax bracket of 37% federal and 5% state, then you take an average which leaves you at about 42%. This means that you’re saving tax on $42,000. You’re reducing your taxable lot through tax liability by about $42,000 with that $20,000 investment. This means that you netted $22,000 based on your investment into this conservation easement.


Michelle Bertram:

That makes sense. One comment I’d like to make is that the IRS doesn’t always like this strategy. They don’t like us to do things that save us tax dollars. 


Congress on the other hand, you know, seems to keep passing. They do like it, which is probably because they utilize them too.


I know you guys take some additional precautions just to protect your inventions by using the one by five ratios but can you talk a little bit about why you feel confident in what you do and the additional coverage or kind of insurance you have on that?

Dustin Jeffords:

Yeah, absolutely. We have done some studies and if you look back to about 10 or 12 conservation easements that have been attached by the IRS, for the most part, the IRS has had very limited success in the auditing of the valuation itself. 


The valuation normally stands up in tax court because it’s less than a 20% reduction in total on those 10 or 12 cases that we looked at. 


Some of those were bad where the valuation went all the way to zero. So it’s significantly less on a per property basis than 20%. So now they’ve started trying to attack at the paperwork level, you know, making sure that your paperwork is buttoned up and they have had some success in those audits.


What we have that no other funds have is we have is a policy that’s underwritten by the Lloyd’s of London. This is an insurance policy that ensures the investors’ principal amount that they have invested. 


The Lloyd’s of London is not in the business of writing claims but in the business of collecting premiums. We have multiple attorneys looking over the paperwork to make sure it’s done properly. We also have the Lloyd’s of London and their attorneys making sure that we’re buttoned up from that standpoint.

Michelle Bertram:

Right. So if I, as an investor, have that insurance and was audited, I still have my investment back if the IRS found anything.


Also, I want to make sure this is clear to you. I think that I can’t be audited as an investor just because I invested in conservation. It has to be added to the top level.

Dustin Jeffords:

Yeah. For a while, the audit rules for a partnership were the tephra audit rules. They don’t have a fancy name for them, but it’s just the partnership audit rules. I’m sure they’ll come up with something at some point, but right now it’s just a partnership audit rules. 


They cannot deny your deduction. That will come from your that you have from investing in the partnership, you’ll receive a K one at your individual 1040 level. 


They’ll have to attack it at the partnership level. So your deduction cannot be denied at your individual level. We have significant reserves set aside if they were to try to audit the partnership to ensure that there won’t be any cash calls or anything like that for the defense of an audit.

Michelle Bertram:

Yes, you’ve taken all the precautions. So as an individual, there’s nothing about conservation easements that are illegal. They’re probably the government themselves, you know, Senators, Congressman, and you’ve taken all the precautions to make sure that it’s safe. It’s not gonna mean I can’t just get out of it because I have it. You’d have to get out of it on the partnership level. And you have the boat, those safety guards all in place. 

So is there a certain time frame that you have? Is it something that we can do any time or is it more of a limited period?

Dustin Jeffords:

There’s not a certain time of the year that you can invest in the conservation easement, but there are certain times available that we have conservation easements open. 


Right now we have one open and it’s closing pretty soon, but we’ll have two more for the rest of the year. We’ll have one that’ll probably open sometime at the start of October and then we’ll have another one rollout at the start of November. 


So, there are opportunities available for this year. In the new year, we start around July or August for our first fund of the year. So, you know, that’s kind of the timeframe that we have these funds available.

Michelle Bertram:

That makes sense because it’s for this year. So right now, if you’re thinking about it for 2020 there’ll be some funds available. 


I think that another key thing that you just said is it’s open, which just means these funds are not like unlimited. It’s based on the land and the property, which is why once you fill up, it’s done, and then we have to open a new fund. 


So, if you want more on this, we’ll talk later. We have some calls that go into a lot more details with Dustin and his team on exactly what these funds are. 


I just wanted to cover these because it’s something that’s not always talked about or if it is, it’s kind of an iffy subject. As you know, Dustin is a tax attorney and the team is making sure that this is an opportunity that is available. We can see what’s available to us and then find ways to reduce the tax.


So, if you have questions make sure you send me a message. Let’s get in touch and schedule you for one of the next calls with Dustin. 




convservation easements and opportunity zones - bertram financialThat covers the income tax. A great strategy for reducing your income tax. Also, I just want to quickly highlight a strategy for capital gains. 


You may run into Capital Gains Tax if you are selling a business, properties, or stock. Whatever appreciation that sale gives us is called Capital Gains. 

A great strategy to work with that Capital Gains tax is something that was created a few years ago called Opportunity Zones. (Read More about Opportunity Zones and Reducing Taxes here.)


Opportunity Zones are certain real estate and geographic areas across the country where the government is incentivizing you to invest in them. A lot of people who understand real estate don’t probably get like the 1031 exchange. If I sell this property and I have a gain, but now I invest in this property, then I offset my capital gains.


If you kind of understand that to a point, but the unique thing about opportunity zones is that you can differentiate. For example, let’s say you sold something for $300,000 and $100,000 was your basis in $200,000 of your gains. 


If you’re looking at an opportunity online, you can take the $100,000, which was your basis and do whatever you want with it and take the $200,000, which was your gain, and invested in an opportunity zone and on the opportunities they’ll fund, which we have a few of those available.

So I’m not going to get in-depth today, but we’ve made sure that we found some good opportunity zones that meet all the tasks and are good funds to invest in, which are diversified across the United States.


We’re not just diversifying or investing in one geographic area, but do you invest in the opportunities zone fund? 


There are a few things that happen. 


If you hold it for five years then you get a reduction on the capital gains that you would pay.


If you hold it longer, you get another reduction. So really, you will receive a 10% deduction. 


If you hold it for five years, you will see another 5% deduction on the capital gains if you hold it for seven years. So that’s a total of 15% reduction on those capital gains that you would have to pay. 


We maybe pay capital gains over time instead of paying that whole $200,000 upfront as well as all of the appreciation on that fund. 


So we put in $200,000 in seven years if we hold it for 10 years and now it’s $300,000. If we’ve held it for 10 years, we don’t pay any tax on the new appreciation. 


Also, in most states, you’re going to be paying high capital gains, or let’s say you have a bunch of stock and you feel like you need to try to diversify or reduce risk, but you’re still going to pay high capital gains. 


This is an option for that scenario, or real estate, or anything else where you are facing capital gains. 


To reiterate, if you’re facing high income tax, you might want to look at a conservation easement. 


If you’re going to be looking at high capital gains tax, you want to look at opportunities where you can stretch those funds over time. 


If you have any questions at all about any of this, please reach out and we’ll get you more information. 


Dustin, thanks for sharing today. I really appreciate your time and we will talk to everyone soon.

Dustin Jeffords:

Absolutely. Thanks, Michelle.

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