“Conservation will ultimately boil down to rewarding the private landowner who conserves the public interest.” – Aldo Leopold
Protecting your land through the donation of a conservation easement may provide significant tax benefits. In order to qualify, an easement donation must be made to a qualified entity, benefit the public by permanently protecting important conservation resources, and meet other requirements under Section 170(h) of the federal tax code and treasury regulations.
The following information is a brief synopsis of some of the tax benefits available. To learn more, please download AVLT’s publication Questions You Should Ask, and visit the Land Trust Alliance and Colorado Coalition of Land Trusts. We also recommend that you consult with an expert for information as to how these incentives might specifically apply to your situation.
For more information, visit Colorado Division of Real Estate and read the Colorado Department of Revenue FYI 39 (conservation tax credit).
Federal Tax Deductions
Congress has expressed its support of voluntary private land conservation since 1976, when it provided tax benefits for qualified donations of conservation easements. Most recently, in December of 2015, federal legislation was passed to make permanent the enhanced conservation easement tax incentive, which allows you to deduct the value of a qualified CE donation up to 50 percent of your Adjusted Gross Income (AGI) per year for up to 16 years, including the year of donation. Qualified farmers and ranchers can deduct 100% of their income per year over the same period. Additional limits and restrictions apply, including the “Pease” limitation, which progressively decreases the value of itemized deductions on earnings over $250,000 – $300,000 (depending on filing status).
Interested in creating a conservation easement?
Estate Tax Benefits
Conservation easements also provide significant estate tax benefits. Not only does a conservation easement reduce the value of property for estate purposes (section 2055(f) of the Internal Revenue Code recognizes that properties under conservation easement are to be valued in their restricted state, as opposed to unrestricted, for estate tax purposes), but Section 2031(c) of the Code also provides an additional 40 percent estate tax exclusion, subject to a cap of $500,000, for land under conservation easement. Some family farmers may also benefit from the Section 2032A election.
The Land Trust Alliance is lobbying for enhanced estate tax benefits for conserved land.
Please consult your tax adviser and attorney.
Colorado Conservation Easement Tax Credits
In response to citizens’ concern over the loss of open space and agricultural land, the State of Colorado passed a series of laws giving income tax credits to landowners who donate qualified conservation easements to a state certified entity. Landowners who donate all or a portion of a conservation easement in accordance with state and federal statues receive a transferable income tax credit that has provided an incentive for private land conservation since 2000.
In 2015, the Colorado legislature enacted additional tax incentives for conservation. Qualified easement donations receive a tax credit worth 75% of the first $100,000 of conservation easement value and 50% of the remaining value up to a maximum credit of $1.5 million. Tax credits may be used against your state tax liability and carried forward for up to 20 years from the year of donation, or you may sell the credit to another Colorado taxpayer (see below). Donors may earn no more than one tax credit per year.
Once a conservation easement is recorded, the transaction and all of its due diligence are reviewed by the Colorado Division of Real Estate (DRE), which has the ability to approve, deny or ask for more information about the donation. Once approved, DRE provides a Colorado tax credit certificate to the donor, and the Colorado Department of Revenue will not be able to disallow the tax credit for issues relating to the appraisal or conservation purposes. Conservation tax credits may not be claimed without a tax credit certificate from DRE.
Aggregate Tax Credit Cap
The amount of Colorado funding allocated to conservation tax credits is capped annually at $45 million. Credits are allocated in the order applications are received by the Division of Real Estate, and once the cap is reached, landowners may be placed on a waiting list of up to $15 million to receive a credit in the following year.
Selling Tax Credits
Taxpayers without enough income tax liability to make use of these credits may benefit by selling all or part of their credit to other Colorado taxpayers. Credits may be sold through one of several land trusts or brokerage services around the state, or by the donor directly. Rates vary, but you can generally expect to receive about 83-85 percent of the value of your credit through a sale. Aspen Valley Land Trust will attempt to help its clients sell their tax credits at a favorable rate. The deadline for selling Colorado tax credits is April 15 of the year following the donation in order for those credits to be applied against the previous year’s tax bill. The sale of a tax credit generates taxable income. If the credit has been held for under a year prior to sale, it may be treated as ordinary income; it the credit has been held more than a year prior to sale, it may be treated as long-term capital gains. Consult your tax adviser for more info.
Refund of Tax Credit
A dollar for dollar refund of the conservation easement tax credit is available to taxpayers in $50,000 increments per year, during years of State budget surplus. Taxpayers should check with their tax advisors as to how and when to take such a refund.
Buying Tax Credits
Businesses or individuals wishing to buy Colorado state income tax credits for the benefit of conservation should contact AVLT to register. Buyers may purchase credits in the amount of $20,000 or more, depending on availability, often at a discounted rate. Tax credits purchases must be completed no later than April 15 in order to apply the credit to the previous year’s income taxes.
The purchase of conservation tax credits can be a great public relations tool for conservation-minded Colorado corporations! Click here for more information on buying tax credits.