Virginia Land Preservation Tax Credits

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A dollar saved on your taxes is more valuable than a taxable dollar you earn from your salary. The Virginia land preservation tax credit can reduce your state taxable income by 16%. For example, if you owe $3,000 of Virginia state tax, it will save you $480. If you owe $30,000, it will save you $4,800. Other states have similar programs, but the details vary.

Every Virginia taxpayer can profit from this technique. The process begins with landowners who donate a conservation easement against their land. In this legal document, owners of private property give up some of their development rights. Usually they donate them to a conservation nonprofit. Because development rights are valuable, their donation is tax deductible.

These donations preserve and encourage permanent open and undeveloped land while keeping the ownership of that land private. For those concerned that land lost is land lost forever, conservation easements are a way to reverse that trend. Land restricted by a conservation easement is preserved in perpetuity. In Virginia, currently 6% of the land not owned by the federal government is subject to permanent conservation easements.

Advocates suggest that conservation easements do permanently what taxation based on land use assessment tries to accomplish every year. That is, they keep open spaces, improving the quality of our air, water and food. To their way of thinking, tax incentives are better spent on land conservation easements than other more temporary methods of land preservation.

To encourage such preservation, the Virginia Land Conservation Incentives Act of 1999 offered strong tax incentives. It allowed a landowner to claim 40% of the value of the easement as tax credits. So if the easement was worth $1 million, the land owner received $400,000 in state tax credits.

Tax credits are much more valuable than tax deductions that only reduce the amount you are taxed on. For example, a dollar of deduction might only be worth 35 cents. In contrast, tax credits are a dollar-for-dollar reduction in your tax bill. And a refundable tax credit could mean the government will owe you money you never paid in the first place.

Land preservation tax credits are not refundable, however, which left some philanthropic families with thousands of dollars of unusable tax credits they could only roll forward for 10 years. So in 2002 the legislation was amended to allow the credits to be transferable.

Now generous donors could sell their $400,000 worth of credits to taxpayers at some negotiated discount. Willing taxpayers could either pay their $10,000 of Virginia state tax or buy credits to pay their tax at a discount. Donors are paid something for credits they can’t use. And taxpayers get a discount on paying their taxes.

This scenario may sound too good to be true or even illegal. But Virginia budgets up to $100 million for qualified land preservation tax credits.

Advocates of smaller government argue that first the state reduces the value of the land it is taxing and then gives that value back in tax credits. All of these shenanigans further the goals of conservationists by burdening commercial land owners. Conservationists don’t care about the lost revenue. They argue that Virginia spends the least on land conservation among the states and continue to push for a vastly increased budget to support these efforts.

We shouldn’t moralize too much when engaging in tax management. If the tax code permits a huge deduction for brushing your teeth with your left hand while standing on one foot, it is still worth doing. The burden is light and the gain is great. Vote your conviction at the polls, but take the benefit.

In this case the benefit can be significant. In 2009, land preservation tax credits were sold at about a 16% discount. Each year this discount is subject to supply and demand. Sellers got about 73% of the value. Of the remaining 11%, 5% went to state transfer fees and 6% to the brokers who put the deals together.

Consider an example. If your income is $200,000 and your deductions are about $25,000, your taxable income of $175,000 means you owe Virginia $10,000. If you purchase credits at 84 cents on the dollar, you save $1,600. That’s a significant savings for filling out a little paperwork.

Brokers do suggest you have at least a $2,000 tax liability before you decide to take advantage of these credits, which would save you $320. Obviously those with a $50,000 tax liability save a whopping $8,000 just for complying with the required clerical work.

The risks are small but do exist. Good brokers weed out questionable credits. They also ensure that sellers provide legal guarantees to protect buyers. In the worst case scenario, the credits are disallowed, the seller refunds your purchase of the credits and you have to pay the full tax you owed.

You must purchase the credits before the end of the year to use them to pay your tax in April. Each taxpayer can use up to $50,000 of credits per year, so a husband and wife could each buy their own and use $100,000. Unused credits can be carried forward for up to 10 years.

Purchasing credits in December at a 16% discount to pay a tax liability in April is an excellent short-term return. But it is even better when you consider that you can avoid paying any quarterly Virginia estimated tax payments throughout the year. Per state regulations, you will owe no tax because of the tax credits you have purchased.

Proactive certified public accountants or financial planners who review your finances and suggest ways to save thousands of dollars are worth their weight in tax credits. Ask your advisor about using this technique to save you money.

Photo by Markus Spiske on Unsplash
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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)