As some of you may know, I am a member of the New River Land Trust (NRLT), an organization that helps educate landowners in southwest Virginia on options for conserving or preserving the natural and cultural characteristics of their land. Through my membership in the NRLT, I've learned a lot about conservation easements, the ecological and cultural benefits they provide to the public, and the financial incentives that make them possible.
Many folks who are staunchly pro-development or even on the fence between development and conservation may consider the idea of conservation easements to be a bit of hogwash. I am not one of those people - I think conservation easements are a beautiful thing, but I will be glad to let the naysayers enjoy their own opinions. Having said that, though, there are some true benefits of conservation easements to the public and to individuals, and that's what I will be covering in this blog post. WARNING: this tends to be a very complex and confusing subject, so I will do my best at explaining it as succinctly as possible. If you find my description lacking or would like more information, please refer to the resources available through the New River Land Trust.
THE BEGINNING - CONSERVATION EASEMENTS EXPLAINED
A conservation easement is an agreement between a private landowner and
a state agency such as the Virginia Outdoors Foundation, whereby the
landowner VOLUNTARILY relinquishes his or her property development
rights IN PERPETUITY (this means no one, not even future landowners, can develop the property for dense residential or commercial use). In this
situation, the property typically has significant special characteristics such as
farm use, watershed management, view-shed protection, or wildlife
habitat - values that, if protected, also would benefit the public. These protected properties also tend to be large in size - 50 to 100 acres or more, depending on their location and the significance of their resources.
Some important things to note: When the landowner relinquishes his development rights, that generally means that no one can build dense residential or commercial buildings on the property. Very often, however, if the landowner wishes, he can retain the right to build one or more houses on the property (depending on its size), as well as accessory structures like barns. The details of what can be built on the property are tailored to fit the landowner's needs and are outlined specifically in the conservation easement document. Another thing to point out is that, while the owner gives up development rights are given up, he may retain the option to timber, farm, or mine the land as he chooses. Again, these are details that are tailored to fit the needs of the landowner while fitting into the spirit of the conservation easement framework.
DIMINISHING THE VALUE OF LAND THROUGH CONSERVATION EASEMENTS
Some people think that restricting development FOREVER on a large piece of land really ties the hands of current and future landowners. Well, I guess it does, but this the conservation easement is a way to ensure that the natural, scenic, and culture characteristics of a place are protected for future generations. You can imagine, however, that when a landowner gives up development rights (and therefore the
opportunity for future development income) through a conservation
easement, the dollar value of the property is diminished. This might be considered the big downside to conservation easements. For instance, let's say for the sake of argument that Mr. Farmer's 200 acres is worth $1 million today with the development rights intact. The land is very fertile and has more than a half-mile of frontage on the New River. Mr. Farmer would like to protect the river front from large-scale development and maintain the natural character of the property, so he decides to relinquish the property's development rights by donating a conservation easement to the Virginia Outdoors Foundation. Following a lengthy and extensive appraisal process, he discovers that the value of the property, after donating the easement, is only $500,000. He decides to go through with the conservation easement, because he knows there are additional financial incentives to compensate him for the loss in value.
FINANCIAL BENEFITS FOR CONSERVATION EASEMENT DONORS
There are several financial benefits available for conservation easement donors, including federal charitable gift deductions, Virginia income tax credits, federal estate tax benefits, and possibly local tax benefits. I'm going to concentrate on the Virginia income tax credits here, because that concept is complicated enough to grasp. As I mentioned earlier, placing a conservation easement on property diminishes its future financial/development value. Mr. Farmer lost $500,000 in the example above (I won't attempt to itemize, however, the environmental, cultural, and other intangible benefits the conservation easement adds). To compensate him for his "loss," the Commonwealth of Virginia would provide income tax credits to Mr. Farmer for 40% of the forfeited value (which equals $200,000 in this example). These credits are called land preservation tax credits. The tax credits are great, right? The landowner doesn't even have to use all of those credits in one year - he can spread their use over 10 years.
The "catch" is, that like Mr. Farmer, many large landowners in Virginia are "land rich and cash
poor," which means that they may not make enough money and owe enough taxes to
use all of the tax credits they receive for their conservation
easement donations. Even if he were to spread it out over 10 years, Mr. Farmer may not owe as much as $200,000 in Virginia income taxes over that time. The great thing in Virginia is, however, that the
landowners like Mr. Farmer can sell their tax credits to any Virginia taxpayer (usually
at at discounted price) and receive cash income for the credits they
can't use.
SELLING LAND PRESERVATION TAX CREDITS
Let's assume that Mr. Farmer's income tax liability remains very predictable each year, and that he consistently owes $10,000 in Virginia income tax annually. Over ten years, he estimates that he will owe $100,000 in Virginia income tax. Therefore, he'd only be able to use $100,000 in land preservation tax credits for himself - the remaining $100,000 worth of credits would be wasted.
Not in Virginia! In Virginia, Mr. Farmer can sell those tax credits to another Virginia taxpayer for cash! This is where you, a Virginia taxpayer, come in. Let's say you expect your Virginia income tax liability for 2007 to be $18,000. You would love to save some money on your tax bill, even if it's only 15-20%. You learn about this land preservation tax credit program and enlist some help from various resources to make it work from you. You discover that Mr. Farmer is willing to sell some of his tax credits to you at a discounted rate. You need $18,000 worth of tax credits to offset your entire tax liability for the year, but you're obviously not willing to pay $18,000 for the credits - what would be the point? You would, however, be willing to purchase those credits for a discount - at, say, 80 cents on the dollar. So, you offer to pay Mr. Farmer $14,400 for $18,000 worth of tax credits. He wasn't using the credits anyway, so he accepts your offer and benefits from the $14,400 in cash. You benefit because your $18,000 in taxes are paid, and you saved $3,600 for the year.
This is a rather simplified example, as the transaction would have to include some official contracts and Virginia Department of Taxation paperwork, but I hope you get the concept. Yes, Virginia, you CAN save 15-20% on your tax bill EVERY YEAR if you know how to contact the right people and fill out the right paperwork. Why am I letting you in on this "secret"? Because there are plenty of tax credits to go around and the transferability of the credits ultimately supports land conservation.
HOW TO MAKE THE LAND PRESERVATION TAX CREDIT PROGRAM WORK FOR YOU
First of all, you have to be a Virginia taxpayer for Virginia's program to work for you. If you pay taxes in another state, do some research to find out if a similar program is available to you.
I recently attended a workshop put on by a couple who have donated two conservation easements for their waterfront properties located on Claytor Lake in Pulaski County. They have established a small business called Full Circle, whereby they facilitate the transfer of land preservation tax credits. They actually locate other landowners who have extra land preservation tax credits, purchase tax credits from them, then resell the tax credits to other Virginia taxpayers. Obviously, they make their money by reselling the tax credits for a little more than they paid for them. They deal only with landowners whose conservation easements are held by the Virginia Outdoors Foundation (to ensure they easements are legitimate), and they do extensive research on the easement itself to make sure there's no reason for the easement to be revoked in the future. They also indemnify their tax credit purchasers, in writing, from responsibility or harm should the conservation easement have problems in the future that would influence the use of the tax credits. Full Circle can work directly with your accountant to make sure you purchase an appropriate amount of tax credits, based on your expected tax liability for the year. It's important to note that, if you want to purchase any tax credits, you'd need to reserve them early in the year (say, in the spring or summer of 2007 for the 2007 tax year) and you'd need to pay for them by December of that year...so no waiting until April 14, 2008 to purchase credits for the 2007 tax year. That's why you'd want to work with both your accountant and a good facilitator to make sure you purchase the right amount of credits.
FOR MORE INFORMATION
Literally millions of dollars in Virginia land preservation tax credits swap hands each year, and there are resources available to make it easy for you to take advantage of the program. For more information on conservation easements, the associated land preservation tax credits, and how the system can benefit you, feel free to contact me (I'll put you in touch with the right people). Or, you can contact the New River Land Trust, the Virginia Outdoors Foundation, or your local land trust (just Google "land trust").
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