Tax credits for easements spur donations of rights

Money earned from the transfer of conservation easement tax credits on Miller family land in northern Larimer County was used for just what one might think a longtime ranching family would purchase: More land.

In recent years the state of Colorado has sweetened the prospects of preserving agricultural land and open space through conservation easements with tax-credit legislation that is among the most generous in the nation.

Those who donate the development rights on their properties to the appropriate nonprofit or municipal entity can earn tax credits of up to $260,000. The amount of the credit is based on the fair market value of the donation; 100 percent of the first $100,000 of value, 40 percent of the excess up to $500,000.

Portions of the credit can be carried forward for use against future tax liability for as long as 20 years. Tax credits can be transferred to other taxpayers or, in the event that the state government experiences a surplus in revenues, submitted for a refund.

The ability to transform these tax credits into cash provides real benefits to landowners, many who are farmers without the high tax liability that would be needed to use $260,000 in tax credits.

While observers say that conservation easements are most likely to be created first and foremost for altruistic reasons – typically to keep agricultural land as agricultural land – the state tax credits appear to have spurred more landowners to donate easements in recent years.

In addition to using proceeds to purchase more land, a generation of aging farmers can use money reaped from the sale of tax credits toward their retirement.

Mike Strugar of the Conservation Resource Center in Boulder observes that the number of donations of conservation easements in Colorado has tripled since the tax-credit legislation went into effect about five years ago. Strugar, an attorney by training, runs a program that helps people sell the tax credits they get for donating conservation easements.

“Colorado has very generous credits,” Strugar explained.

Brand-new industry

As a facilitator brokering the transfer of conservation easement tax credits, Strugar represents a brand-new industry. And a growing one, at that.

Strugar said he has about 100 different conservation easement donations registered to sell in 2005. “We have never not sold them all,” he said, noting that 2005 represents the second year running when he will have more prospective buyers than sellers.

These facilitators serve as intermediaries in the transfer of tax credits. Carl Spina of Loveland-based Conservation Tax Credit Transfer LLC said his company does due diligence on the donation package to ensure that all state and federal laws and regulations are followed or met in the donation of the conservation easement.

 “Once we have accepted the qualified credits that were associated with that donation, we find a buyer who can use those credits in the tax year in which they are purchased.”

Conservation easement donors frequently can’t use all or most of the tax credits themselves, Spina said. “Most people would have a tax liability of maybe $2,000 to $5,000 and farmers and ranchers have less than that. They wouldn’t be able to use the tax credits, so that’s why the statutes include a transfer of those credits.”

The seller of the credits offers them at a discount – typically 80 to 85 cents on the dollar. The facilitator receives a portion of that as a fee for facilitating the transfer – typically 5 cents on the dollar.

Buyers may be individuals, corporations or publicly traded companies, Spina said. These buyers, who have a high state tax liability, benefit by purchasing these credits at a discount.

Other tax benefits

The state tax credit program is one of four main tax benefits available to landowners who donate conservation easements on their land.

Perhaps the next most significant for Colorado landowners is the federal deduction.

“If you have an easement worth a million dollars that you’re donating to Larimer County, it’s just like you donated a million dollars in cash to the United Way. You’ve gotten a whopping big charitable deduction,” Strugar said.

The federal income tax deduction reduces the landowner’s taxable income.

Two other tax benefits come from the conservation easement’s effect of lowering the value of the land.

Removing development rights from the land reduces its value and lowers estate taxes. Strugar said there has been less interest in this benefit recently as the estate tax system is being phased out. “By 2010 it is completely to zero. In 2011, unless Congress acts, it would spring back to the full amount before the phase-out started.”

Due to this uncertainty, less planning is directed in this area, Strugar said.

Lowering the value of the property also potentially lowers property-tax liability.

Whether it’s tax credits or a deduction for a charitable contribution, the tax benefits tied to donating a conservation easement are intended as incentives, said Steve Ryder, executive director of the Legacy Land Trust, a nonprofit organization that accepts and monitors conservation easements.

“There are meant to be incentives to give landowners a sense of value or some sort of incentive to at least consider conserving their land,” Ryder said.

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