Virginia land preservation tax credits: a sensible investment in a weak economy
- September 28, 2009
Conservation easements are the most effective means of ensuring that privately-owned property is kept permanently available as open space. Easements restrict development to protect identified conservation values and to guarantee that the benefits the general public is receiving from the land will continue. Careful drafting of an easement is necessary to make sure that these conservation values (including agriculture, forestry, wildlife habitat and scenic or historic assets) will be protected in perpetuity, providing a public service that is rewarded by state and federal tax benefits. These financial incentives are offered to donors of qualifying easements as a way for the public to share with landowners the costs associated with permanently protecting the important conservation values of their land.
The Virginia Land Preservation Tax Credit is a substantial state income tax benefit that can be used to offset an easement donor’s tax liability dollar-for-dollar, with the added bonus that donors can sell any unused credit to other Virginia taxpayers. A credit equal to 40 percent of the property’s “easement value” (the difference between its pre-easement and post-easement value) can be used to pay off the easement donor’s state tax obligation for the year of donation and over the following 10 years. The marketability of unused state income tax credits has proved especially effective in encouraging the protection of thousands of acres statewide.
In addition to protecting Virginia’s dwindling open spaces, land preservation tax credits have become very worthwhile investments, especially in these financially turbulent times. Land preservation tax credits are investments, but the risks and rewards are quite different from those encountered when investing in stocks or ETF funds.
To illustrate the rewards of these credits, let’s assume the following:
• Household income of $200,000
• Deductions and exemptions of $25,000
• Virginia taxable income of $175,000
• Virginia income tax liability of $10,000
In this scenario you can purchase $10,000 of Virginia land preservation tax credits for $8,400, yielding a $1,600 savings.
Next, let’s consider the time value of money in this equation. If you purchase your credits on Dec. 1, file your Virginia tax return on April 1, and receive your refund on May 1, the annualized return on your investment is more than 38 percent. That’s correct, 38 percent. Although the discount is fixed at 16 percent, your money typically is tied up for under six months, and even less if you file your tax returns early or can purchase your credits closer to the Dec. 31 deadline (supply is fairly limited the later you wait).
This might sound too good to be true, so let’s consider potential risks. A risk associated with stocks and mutual funds is the inability to predict future value; in addition, there are zero assurances to protect your investment. Landowners who generated the land preservation credits will transfer those credits at a fixed price in addition to their guarantee of the credit value. This means that should the credits you purchase be improperly valued, the landowner will indemnify you and return a portion of your investment to reflect the revised value. And there are still other ways to minimize your risk.
Credit purchasers must be certain that their credits stem from an easement appraised by a qualified conservation easement appraiser, and they will want assurances that the attorney who drafted the deed of easement is knowledgeable in this area of law.
Finally, the intermediary from whom you purchase the credits also can offer comfort in the transaction. The IRS has challenged some Virginia conservation easements so it is imperative that you checkout the facilitator packaging your tax credits for sale.
Her are a few good questions to ask your intermediary:
• What dollar value of tax credits have you transferred?
• Have you had credits questioned or devalued by a regulatory authority?
• What assurances do you provide?
• Do you manage the easement donation process including deed and appraisal reviews against unequivocal quality standards?
Purchasing land preservation credits and generating over 38 percent return on investment doesn’t need to be difficult. It just needs to be thorough.
George D. Forsythe, CPA, is a partner with Wells, Coleman & Co. LLP. He may be reached at firstname.lastname@example.org. William H. Funk, a writer and attorney from Staunton who formerly was an easement specialist with Conservation Partners LLC, can be reached at email@example.com. For more information on land preservation tax credits, contact Conservation Partners LLC at firstname.lastname@example.org.