Question: A coworker told me about a money-saving opportunity by purchasing Virginia land preservation tax credits. What is your opinion of this strategy? Please explain any of the risks involved.
Taming the Tax Man
Dear Taming the Tax Man,
I generally try to discourage financial advice from coworkers but not in this case. Virginia land preservation tax credits are a savvy way for you to save up to 25% on your state tax bill.
These credits are created when a landowner gives up development rights to his or her land. Virginia budgets $100 million each year to promote this green initiative. Since 2002, land preservation credits have become transferrable, which means that you or I can purchase them for a discount of their face value.
For example, if you owe $3,000 in Virginia state tax each year, credits can save you up to $750. If you owe $30,000, it can save you $7,500. Remember, credits are more valuable than deductions. A dollar of deduction reduces your taxable income and might only be worth 35 cents. A credit reduces your tax the full dollar.
The risks are small but do exist. There is always going to be a greedy landowner who attempts to gain more from this opportunity by claiming an excessive easement value. Good brokers weed out questionable credits by working with qualified appraisers. Ask your broker if they have had any credits questioned or devalued by a regulatory authority. And make sure your broker has several years experience with this process.
Additionally, the seller of the credits should provide you with a warranty, or indemnification. This legal document states that if a credit is rejected, it is the seller’s responsibility to make the buyer of credits whole.
The other risk to consider is that these credits are often purchased before the end of the year. You need to plan ahead and purchase credits before they run out. Those who plan ahead can be rewarded with a larger discount. Some brokers sell credits for a 25% discount earlier in the year, but you are not likely to see more than a 15% discount if you wait until December.
If you work with a trusted broker, Virginia land preservation tax credits can provide a healthy return on your money with limited downside risk.
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