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Few tax incentives accomplish as much as the Virginia Land Preservation Tax Credit. The credit, enacted in 1999 by the Virginia General Assembly, allows landowners to receive a Virginia tax credit for donating land to create or interest in the land in the form of a conservation easement. If a landowner has a 1000-acre tract zoned to be divided into 100 lots, they can donate a conservation easement that says the property can only be divided into, say, five lots. Because they are preserving open space that yields public benefits such as wildlife habitat or scenic beauty, the landowner is eligible to receive a 40 percent state tax credit on the value of the easement. Example: Tom owns land appraised at $1 million before a conservation easement and $600K after extinguishing certain rights through an easement. Tom would be able to receive a 40 percent tax credit of $160K on the difference of the pre-easement value versus the post-easement value or “donated amount” ($400K * 40 percent = $160K tax credit).
If I’m not a landowner, how does that affect me?
In 2002, the credit was made transferable, allowing land rich but cash poor landowners to monetarily benefit from their donation by selling the credit. More than 800,000 acres have been conserved since, and about $1.6 billion dollars in credit has been transferred. The credits, purchased directly from individuals or through an exchange for an average of 88 cents on the dollar, are a dollar for dollar credit on your Virginia State Income Tax. Example: If John owes $20K in Virginia state income tax and purchases $20k worth of tax credit for $17,600 (88 cents on the dollar), he would save $2400 ($20K tax liability – $17,600 actually paid for tax credit) in Virginia taxes. The $2,400 in savings would be taxable income the following year and would be taxed at John’s tax rate if the credit was purchased and held for less than a year or as a long term capital gain if the tax credit was held for more than a year.
How to Purchase Land Preservation Tax Credits
There are important considerations when purchasing credit, such as working with a reputable CPA and brokerage firm. The land appraisal for the conservation easement needs to be accurate or the IRS may disallow the credit. A quality brokerage firm evaluates the appraisal to ensure the purchase of quality credit and manage the purchase process, filing the correct paperwork, and negotiating a purchase price. Acquiring credit also has tax planning implications, so it is important that your CPA examines your tax liability to help calculate a proper purchase amount. Credits are a very limited resource each year, so it is important to know when credits are available for purchase. Wendroff & Associates maintains relationships with several local, reputable brokerages to alert clients when credits are available and to ensure the purchase of quality credits and proper tax planning.
Who Should Purchase Credits
For 2018, individual taxpayers can purchase up to $20K of credit, and married-filing-jointly couples can purchase up to $40K ($20K a piece). Generally individuals expecting a large state tax bill should consider purchasing credits, such as an individual selling a business or an S Corporation or Partnership where the income is passed through to the individual. In addition, sole proprietors, individual and joint filers with employee wages over 200k should look into the credit. The credit can be carried forward 10 years after the year of issuance. The year of credit “issuance” will be identified in your purchase contract, so you know how much time remains to use the credit.
Conclusion
Since local land is generally not converted into conservation easements, the credit is not well known in Arlington or DC, but for individuals in the right situation, purchasing credit can be a powerful tax strategy for lowering your state income tax liability. The credit is a limited resource and prices tend to rise as the year goes on, so it’s important to purchase credit early to get the best rate. To get more information on donating conservation easements or locating a Preservation Credit brokerage, contact the Virginia Department of Conservation and Recreation at 804-786-6124.
And for information on tax planning strategy and purchasing Virginia Land Conservation Credits, please contact Darren Wendroff at Wendroff & Associates (703-286-5845 or darren@wendroffcpa.com).
