Mastering Tax Breaks

This weekend's Masters golf tournament featured the usual perfect weather, gorgeous scenery, and competitive play that fans have loved for so long. Tiger Woods came into the tournament as the betting favorite based on his win at last month's Arnold Palmer Invitational — his first tour victory in nearly three years. But Tiger's performance disappointed his fans yet again — in fact, he even hit a spectator on Saturday. And in the end, Bubba Watson became only the third leftie in history to don the coveted green jacket.

It turns out Tiger isn't the only one having trouble on the course. Our good friends at the IRS have also "sliced into the rough" over the question deducting conservation easements for golf courses. A "conservation easement" is a gift of a partial interest in real estate you make to a publicly-supported charity or government. If you own a historic townhouse, for example, you might donate the right to make changes to the facade, to ensure it keeps its historic character. If you own a farm at the edge of the city, you might donate development rights, to ensure it remains green space. You’ll need an appraisal to support the value of your gift, as the IRS is cracking down on inflated conservation easement deductions. If your gift exceeds 50% of that year’s adjusted gross income, you can carry forward the excess for up to 15 years (rather than the usual five year limit for all other charitable gifts).

The easement in question involves Kiva Dunes — a Jerry Pate-designed golf course nestled on Alabama's Fort Morgan Peninsula, which is tucked neatly between Mobile Bay and the Gulf of Mexico. The course is surrounded by 163 upscale homes, including 30 right on the beach. It's no Augusta National, of course, although Golf Digest has ranked it the best course in Alabama. Back in 2002, the partnership that owns Kiva Dunes placed a conservation easement on the course, limiting its use to a golf course, park, or farm. They appraised the easement at $30.6 million, donated it to the North American Land Trust, and happily deducted that amount on their partnership return. (Not bad, considering the owners paid just $1.05 million for the property encompassing both the course and the homesites back in 1992!)

Not surprisingly, the IRS ruled the deduction out of bounds — valuing the easement at just $10.0 million — and the case wound up in Tax Court. The Court started by noting that the partnership's appraiser lives and works in the immediate vicinity of the course and has decades of experience evaluating local properties, while the IRS's appraiser lives 250 miles away in Birmingham and has only visited the vicinity of the course twice. Then they estimated how much the owners could realize if they subdivided the property for the same sort of instant mansions already surrounding the course ($31.9 million). Next, they calculated the current value of the golf course (just shy of $3.0 million). Finally, they subtracted the current value from the potential value to settle on a $28.7 million value for the easement — really, just a chip shot away from the partnership's original appraisal.

The law allowing deductions for conservation easements expired at the end of 2011. That's not necessarily the end of the story, though — lots of popular tax breaks expire, then come back from the dead. But this one may be more dead than usual. That's because President Obama's 2013 budget proposes to eliminate deductions for golf course conservation easements entirely, arguing that they do more to benefit the people living in the McMansions surrounding the courses than the general public. Thus, Kiva Dunes's owners may be the last to benefit from this hole-in-one of a deduction.

Minimizing your taxes may look hard, but it's a lot easier than driving straight down the fairway. Proactive planning is the key to staying out of the sand and water. Remember, we're here for you — and the rest of your foursome, too!