Tax Credits for Donating Conservation Easements: What You Need to Know and Why You Should Take Advantage

By: Alex E. Castellano

It often seems impossible to do something that is great for both the environment and your wallet.  However, every landowner in Virginia can do just that.  One of the most valuable and well-kept secrets regarding tax benefits available to landowners in Virginia is the Land Preservation Tax Credit (“LPTC”).  You can qualify for an LPTC by donating a conservation easement to a public or private 501(c)(3) nonprofit for one of the following uses: (1) agricultural or forestal use; (2) conservation of open space, natural resource, or biodiversity; or (3) land, agricultural, watershed, or historic preservation.

A conservation easement restricts certain uses and development of land in order to preserve its natural or historic state in perpetuity.  An easement is not a conveyance of the property itself, but rather permits or restricts future uses of the property as specified in the easement.  Conservation easements allow landowners to have a positive impact on the environmental future of the Commonwealth while retaining their possessory interest in the property.  It also makes such landowners eligible for highly valuable tax benefits.

Unlike many tax benefits which allow you to take a deduction from your taxable income, the LPTC provides you with a credit towards your tax bill.  A tax credit is a dollar-for-dollar reduction in your tax bill in the credited amount, regardless of your tax rate.  On the other hand, a deduction lowers your amount of taxable income.  This means that the value of a deduction is calculated by multiplying the amount deducted from your taxable income by your tax rate.  Simply put, tax credits are always more valuable than deductions.

Here is a simple example: If you receive a tax credit worth $1,000, your tax bill is reduced by $1,000.  If you take a $1,000 deduction, the benefit is that you are not taxed on that $1,000 at whatever your tax rate may be.  Because nobody is taxed at 100%, the value of a tax deduction will always be less than the value of a tax credit no matter what your tax rate is.

The LPTC provides donors of a conservation easement on their land with a state income tax credit equal to 40% of the fair market value of the easement.  This tax credit may be used to reduce the donor’s state income tax and can have as significant an impact as completely offsetting the donor’s state income tax for multiple taxable years.  Moreover, these tax credits are transferable, devisable by will, and roll over to future years. 

To illustrate this benefit, a donated easement appraised at $250,000 results in a tax credit to the donor of $100,000.  The donor can then use this credit against his or her annual state income tax up to $20,000 per year.  This limit is scheduled to increase to $50,000 per year beginning in 2020.  All unused tax credits after the first taxable year are good for an additional thirteen years and can even be sold or transferred to another taxpayer. 

Virginia currently has a $75 million cap on the amount of LPTCs that it will issue each year.  This means that these tax credits are issued on a first come, first served basis.  Due to the fact that donations which meet the requirements for a Virginia LPTC are also charitable gifts, donors may be eligible to receive a deduction from their federal income taxes as well.

If you would like to protect and preserve the natural or historic beauty of your land while also receiving significant tax benefits for doing so, contact an attorney to make sure that this process is handled appropriately.