Updated April 12,2017
Donation of a Conservation Easement
Conservation easements are voluntary restrictions that landowners place on their land in perpetuity to preserve documented conservation values. Easements generally limit the extent to which land can be developed. Each easement is individually negotiated and tailored to meet that landowner’s needs. Donation of a conservation easement ensures the land is kept in a rural state consistent with the donor’s (landowner) wishes.
State Tax Credit
A Virginia state tax credit has been established for conservation easements at 40% of the value of the easement. The amount of the credit that may be used by an individual taxpayer may not exceed $20,000 for taxable years 2015, 2016 and 2017, but any unexpended portion may be carried forward for 12 taxable years. Using the example from above of an easement value of $300,000, the easement donor would receive $120,000 in VA Preservation Tax credits that could then be used dollar for dollar at maximum amount of $20,000 per year to pay VA state income taxes.
In addition, any unexpended portion may be transferred to another Virginia taxpayer (in other words tax credits can be sold for cash). A recent tax court opinion suggests that the income from the sale of tax credits held for more than one year prior to sale may receive more favorable long-term capital gains treatment. Check with your tax advisor or attorney to determine whether and when tax credits should be sold.
For a fee of generally 6% of the credits sold, tax credit facilitators (essentially brokers) will help easement donors to market credits at 89-91 cents on the dollar. The New River Land Trust can provide easement donors with a list of facilitator; however, at no cost, landowners can recruit buyers themselves or work with the New River Land Trust to find buyers at 90 (average in 2016) cents on the dollar.
Other things to note, the state:
- Will only register $75 million a year in state tax credits. Any tax credits that can’t be registered in a given year will be carried over to the next year.
- Will charge a transfer fee paid to the Dept of Tax of 5% of the value of the credits transferred.
- Has an additional review and verification process for all easements with a tax credit valued at $1 million or more.
Which taxpayers can sell conservation tax credits?
Any person who owns land in Virginia and who donates an easement is eligible for a tax credit which they can use or sell. Out-of-state landowners cannot use them to pay other state income taxes, but they can easily sell the tax credits to people who pay VA taxes.
Is the income from a tax credit sale taxable to the seller?
Virginia does not tax the sale of the tax credit. But the IRS does. For federal taxes, the sale of tax credits is a capital gain to the easement holder. Notably, tax credit sellers can use their federal tax deduction to reduce the impact of this income.
Which taxpayers can purchase and use VA tax credits?
Individuals and businesses (corporations, partnerships, limited liability companies LLCs) can purchase tax credits to reduce their Virginia income tax bill.
How will a landowner benefit?
Landowners benefit by receiving income from tax credits that might otherwise go unused. They are also harvesting today’s considerable development premium from their land without having to sell any of their land. All Virginia residents benefit from protection of the state’s natural environment, open spaces, farmland, and wildlife habitat. The New River Land Trust (NRLT) will be glad to assist landowners in finding buyers for their tax credits.
Where can I get more information?
Call John R. Eustis at 540-951-1704 or e-mail at
email@example.com. You can also get information and a tax credit application at www.tax.state.va.us, the Virginia Tax Website where you can download form LPC-1 and the LPC-1 Instructions (listed both under individual and business credits).
As always, NRLT strongly urges prospective easement donors to consult their own financial and legal