Conservation Easement - Income Tax Credits (states)

Income Tax Credits (states)

Land conservation advocates have long tried to enact additional tax incentives for landowners to donate easements, above the federal charitable deduction (and state tax deduction in states that conform to federal tax process). There has been discussion of creating a federal income tax credit for easement donors since around 1980.(comments?) However, no federal tax credit has been enacted. States, however, have moved ahead to grant credits that can be used to pay state income tax to donors of qualified conservation easements. In 1983, North Carolina became the first state to establish such a program.

Attorney Philip Tabas of The Nature Conservancy promoted the state tax credit idea widely in the 1990s. In 1999 four state legislatures enacted state tax credit programs (Virginia, Delaware, Colorado, and Connecticut, in that order). South Carolina and California followed in 2000. Several other states have followed since.

For landowners with little income subject to state taxation, a tax credit is a hollow reward for reducing the value of real property by donating a conservation easement. To respond to this, Colorado conservationists made their state tax credit transferable in 2000—that is, the donor/landowner can sell her/his credit to other parties; the buyers then use the purchased tax credit to pay their Colorado income tax. This is appealing to buyers because the credit is sold at a discount from face value. Virginia followed by enacting transferability in 2002. Delegate Bill Howell (now Speaker of the Virginia House of Delegates) introduced HB1322, which had been suggested to him by conservationists Charles Davenport and Phil Hocker. HB1322 was enacted, effective retroactively to 1Jan2002. Other states have followed since. However, "caps" on the amount of credit an easement can generate, and other restrictions, limit the scope of the different state tax credit programs in varying manners.

In the states where credit for conservation land donations is transferable, free markets have arisen. Brokers assist landowners with excess credit to contact buyers, and the brokers often handle payments and paperwork to protect the principals, and to ensure that transfers are fully reported to the state tax authorities. The federal and state tax treatment of profits from sale and use of transferable tax credit have been the subject of extensive discussion and the issuance of several guidance documents by the Internal Revenue Service.

The New Mexico state income tax credit was originated in 2003. New transferability legislation, effective January 1, 2008, applies retroactively to conservation easements effected from January 1, 2004.

The Virginia transferable credit program is far the largest among the States in dollar value of property conserved. By the end of 2010, $2,512,000,000 of property value had been donated as easements in Virginia for which tax credit was claimed. The qualifying easements cover over 516,000 acres (2,090 km2) of Virginia landscape. The Virginia program now (2011) grants about $110 million of new tax credit each year. The credit allowance is 40% of the appraised value of the easement donation, so this equates to $275 million of property value donated per year for protection of wildlife habitat, farmland and woodland, and scenic open space—in perpetuity. The other state tax credit programs are smaller in dollar measurement, but are very significant in the area and the conservation values that they cause to be protected. The concept of state tax credit action (in the absence of a federal tax credit) that Philip Tabas and The Nature Conservancy promoted in the 1990s has borne remarkable fruit, and continues to expand today.