Maximize Your Social Impact: How the Tax Code Rewards Doing Good
Those of us who pay personal or business tax in the United States understand how far reaching Uncle Sam’s influence can be. As a result, exploring the sections of the tax code that offer potential relief has always been a worthwhile pursuit. Understanding the provisions that reward doing good in the world is especially compelling, as it aligns closely with a broader philosophy of doing well by doing good.
Land Conservation
There are multiple ways to donate land and receive meaningful tax benefits. One option involves a landowner making a complete donation of land to a qualified organization. That donation may be claimed as a charitable income tax deduction based on the property’s fair market value, up to 30 percent of the taxpayer’s adjusted gross income. Adjusted gross income includes all types of income, from earned income to passive income to capital gains.
Another, lesser known strategy involves creating conservation easements. A conservation easement is a voluntary, legal agreement that permanently limits the use of a piece of land in order to safeguard its conservation value and protect it for future generations. All conservation easements must provide public benefits, such as improved water quality, preservation of farm and ranch land, protection of scenic views, wildlife habitat, outdoor recreation, education, or historic preservation. When structured to meet the requirements of federal law, a conservation easement donation can result in significant tax benefits.
There are three main advantages to conservation easements for an investor. First, they may qualify to deduct up to 50 percent of their adjusted gross income. Second, that deduction can be carried forward for up to fifteen years, compared to just five years with a simple land donation. Third, the investor still retains ownership of the land and can continue to enjoy it in its natural state for as long as they own it.
A Strategy With Personal and Generational Benefits
This approach can be especially valuable for those who own a home on a large parcel of land. It allows the homeowner to retain full rights over the portion of land where the house sits, while donating the easement on the adjoining parcel. This structure lets a family continue enjoying activities such as hiking, horseback riding, and simply appreciating the natural beauty of their property, all while realizing significant tax savings. It is often a useful tool in estate planning as well, since it may help pass land on to the next generation at a substantially reduced valuation, under IRS Section 170H.
Tax-Advantaged Real Estate Investments
The IRS also allows for deferral of capital gains taxes when proceeds from the sale of an investment property are exchanged for a like kind property of equal or lesser value within specific time limits. Commonly known as a 1031 exchange, this strategy can be used to defer capital gains tax to a later date, and there is no limit to how many exchanges an individual can complete, under IRS Section 1031.
Another strategy worth considering when offsetting capital gains taxes involves Opportunity Zones. When Congress passed the Tax Cuts and Jobs Act in December 2017, it created a new section of the tax code that established Opportunity Zones across the country. An Opportunity Zone is a community designated by the state and certified by the IRS to stimulate economic activity in specific areas nationwide, with roughly 8,700 zones designated across all fifty states. Opportunity Zone investments allow investors to defer capital gains taxes until 2025, at which point the original tax liability becomes due. However, investments made in the fund prior to December 31, 2021 receive a 10 percent reduction on that liability. The most significant advantage is that investments held in an Opportunity Zone Fund for ten years or more may potentially avoid federal taxes altogether on profits earned within the fund.
In summary, for those willing to look closely, the U.S. tax code does offer real opportunities to reduce both income and capital gains taxes. It remains important to consult an accountant or other qualified advisor to fully understand how these provisions apply to any individual’s unique situation. Understanding how to offset tax liability can free up additional resources to further both business and philanthropic goals, a genuinely winning combination.
Keystone National Properties is a real estate and private equity firm specializing in the sponsorship of tax advantaged and impact investment opportunities for accredited investors and family offices.
Keystone National Properties, including its subsidiaries and affiliates, does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal, or accounting advice. Readers should consult their own tax, legal, and accounting advisors before engaging in any transaction.
Mike Packman, Founder and CEO
Keystone National Properties | KNPRE.com
