How do they work and why has the IRS cracked down?

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for the high-net-worth investor and consumer. subscription To receive future issues, directly to your inbox.

Congress is moving to expand a land conservation tax incentive that has spent nearly a decade under IRS scrutiny. House and Senate proposals for the farm bill would create a new program to provide funding to landowners who agree to keep forests intact rather than sell or develop them.

The IRS has cracked down on custody credits after groups of investors used them to generate billions of dollars in bloated tax deductions. However, the tax strategy is still valuable for individuals and families who want to keep their land and pay Uncle Sam less, attorneys who specialize in easements told CNBC.

More than a dozen states offer some type of tax exemption for land donations, and some, including New York, Colorado and Georgia, have aggressively expanded their easement programs in recent years.

“I meet people who say, ‘Wow, conservation easements are bad things. They’re offensive.” No, they’re not. “It’s for a small group of people and a small group of people who were caught in this by bad actors,” Florida attorney Keith Fountain said. “My clients are people who own the land and love it, and conservation easements provide a way to get some financial benefit and preserve that land and own it and manage it for the right purposes in perpetuity.”

Easements allow landowners to retain ownership of the property while giving up some development rights. Typically, the owner agrees to permanently limit how the property is used, often to preserve farmland, wildlife habitat, or open space. The landowner can then donate the lost development rights or sell them at a discount to a land trust, government agency, or other qualified group.

In return, the owner can claim a charitable deduction. In many cases, they can still reside on the land and use it for recreational purposes such as hunting and fishing, as long as it fits within the restrictions of the easement.

Fountain said many of his ranching clients sell easements to keep the land in the family and use the proceeds to pay off debt or buy out younger family members who aren’t interested in ranching. By selling easements on their land at a discount, clients raise cash and can claim a charitable deduction for the difference between the sale price and fair market value.

The transactions targeted by the IRS involve groups of investors, not individual long-time landowners. In so-called joint conservation easement deals, the promoter sells shares of land to investors and donates the easement rights. By using an overvaluation of the property’s development rights, investors can claim a tax deduction that exceeds what they paid for the land.

In a recent example filed last week, the U.S. Tax Court reduced a $41.6 million deduction claimed by an Alabama partnership to $800,000. The court agreed with the IRS that the deduction was based on a speculative assessment of the property’s potential as a limestone quarry.

Congress capped conservation easement values ​​in 2022 in order to close shared easements, but the IRS is still wading through about 1,100 cases. The agency extended the settlement offer in May in an attempt to reduce the backlog.

While the government has targeted condominium deals, individuals can still trigger an IRS audit by donating an easement. For this reason, Fountain said his clients usually choose to sell the easements at a discount even though donating them could come with better tax advantages.

Many attorneys refuse to advise on conservation easements altogether. However, Carolyn Schenk, a former national fraud advisor for the IRS, told CNBC that conservation easements should not be written off.

“The fact that some taxpayers are abusing the rules, I don’t think, means that the underlying policy lacks value in any way,” said Schenk, who left the IRS in 2025 to work at the law firm Caplin & Drysdale. “I think there is a feeling in the IRS that properly upholding easements is not a loophole.”

In the past two years, the Tax Court has typically focused on the actual value of relinquished development rights to the land, according to attorney Diana Norris, associate director of conservation advocacy at the Land Trust Alliance. This focus on assessments has removed a lot of uncertainty for land associations and landowners, since previous conservation easements often relied on technical flaws in the title deed or donation paperwork, she said.

Conservation easements are not risky if you work with an attorney who follows case law and enforces it frequently, said attorney Steve Small. Small helped write the tax code for conservation liens in the early 1980s when he was with the IRS.

The biggest problem, he said, is dealing with clients who have unrealistically high expectations about how much they can deduct, which he blames on promoters of joint easements. For recently purchased properties, the discount will be a percentage of the purchase price, not a multiple, according to Small.

Donors should also take into account less obvious factors that could diminish their discount, he said. For example, easements can enhance the value of surrounding properties by preserving scenic views and privacy. If the easement benefits an adjacent property owned by the landowner or a relative, the additional value must be subtracted from the deduction, Small said.

He also recommends that clients include plenty of photos of the land with their submitted models.

“What does the IRS get when you take the easement deduction? A lot of printed paper,” he said. “They don’t feel at all the beauty of the project or the views across the open space.”

Small said the audit risk is minimal if the conservation easement is intact, especially with the IRS being understaffed.

“Honestly, I think if you did a good, honest easement project today, the risks would be less than they were 10 years ago,” he said.