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Potential risks of CDT investment programs

On Behalf of | Jul 14, 2022 | Firm News

Investing in conservation donation transactions (CDTs) in Georgia can entail a wide variety of potential benefits. But a buyer should be aware that they can also carry more than their fair share of cons. This is all the more true when it comes to a special kind of CDT known as syndicated conservation easements (SCETs). These can be extremely risky.

You can face a higher audit risk

One of the biggest potential cons associated with this type of CDT is the risk of syndicated conservation easement audits. This can be a particularly unpleasant judgment that is entered against you by the IRS. Certain types of SCETs, such as so-called fee-simple donations of land, tend to be tax shelters. As such, they must be reported to the IRS in minute detail. Failure to do so can result in an audit.

The IRS has also made it known that they are planning to audit most, if not all, SCET and other similar platforms that can be classed as pass-through entities. This may result in reductions in the total number of tax deductions that are available. It may also lower the total value of these deductions while simultaneously recalculating your number of liabilities.

SCETs can be subject to inflated appraisals

Another common pitfall associated with SCETs is serious inflation in the appraisal of their worth. This is one of a set of warning signs that an astute investor should be looking for. If the value that is stated is higher than the average, this is a red flag.

You can be sure that the IRS is likely to have its eye on any kind of investment program whose returns are predicated on deductions via charitable contributions. If these deductions result in inflated figures, an audit may be imminent.