By Timothy Lindstrom
If you own more than 100 acres in Rappahannock County and don’t plan to develop, now is the time for a conservation easement. The financial benefits of land conservation will never be better.
Most landowners know about tax deductions for conservation easement contributions. Those, like all deductions, are for rich folks. However, Virginia provides tax credits for land conservation and those tax credits can be sold, regardless of your income.
I realize that talking about conservation easements and tax benefits in Rappahannock County is preaching to the choir. However, with about 79 percent of the land in Rappahannock owned by folks who haven’t done easements, it appears that there are a number of non-choir residents who might benefit from the sermon anyway.
In the interest of full disclosure: My family and I have contributed easements on farms in Albemarle County and in Michigan. There were no tax credits available in those days; but I have never once regretted the decision to protect those places (although I rather wish the tax credit program had been in place when I did the Albemarle County easement). Also, I am a conservation easement tax lawyer; so I have a financial stake in the use of conservation easements, not just a moral one.
Let’s look at an example: Suppose you own 250 acres just outside of Sperryville. Local real estate listings suggest that your land might be worth $5,800 per acre, or a total of $1,450,000. Under existing zoning, due to topography and water, let’s assume you could divide the 250 acres into eight residential lots.
Instead of dividing the land, you contribute a conservation easement that limits you to no more three parcels (two divisions). The easement reduces the value of the property by 60 percent to $580,000. This means that the easement is worth $870,000. Virginia will allow a tax credit for this easement in the amount of $348,000 — 40 percent of the easement value. If you have a very substantial income, you can offset your Virginia income tax with this credit. If you don’t have a substantial income you can sell the credit.
Of course, there are costs of sale that include a discount to the buyer (no one will pay $1 for a credit worth $1 because there is no point in it); a 5-percent fee to the Commonwealth, credit broker’s commission and legal and appraisal fees. Taking all of this into account, the easement donor in this example could probably expect to net around $265,000 to $270,000 from the sale of tax credits. In addition, of course, the donor is entitled to federal and state income tax deductions which, if nothing else, will help to shelter the amount received from selling the credits which is taxable income.
It may not seem to be a very good deal, selling development rights worth $870,000 for $270,000. The truth is it isn’t — if you want to preserve your development potential rather than your land. However, if you are like many landowners, you don’t want your land developed and you could probably use some cash. In that context, $270,000 is a great deal since you are selling something for which you have no use.
I shouldn’t completely ignore federal and state income and estate tax benefits. The top federal income tax rate is currently 39.6 percent and the top Virginia rate is 5.75 percent; combined they create a rate of 45.35 percent. If all of the income sheltered by the $870,000 conservation easement contribution were taxed at this combined rate, in addition to the proceeds from selling the tax credit, you would enjoy $394,545 in income tax savings. Of course, many landowners in the county will not have income sufficient to result in these savings because most folks’ income will be taxed at lower rates, which reduces the tax benefits realized from charitable deductions.
In addition to income tax benefits, there is also a federal estate tax benefit. However, under current federal estate tax rules, if you are single you are entitled to a $5,340,000 exemption from estate tax; if you are married you are entitled to double that as a federal estate tax exemption. Everything over the exemption amount is taxed at 40 percent, so if you have a large estate, planning is important, especially if you own valuable land. Those with taxable estates containing land conservation easements can help reduce exposure to estate tax dramatically.
Many years ago, when I was still a county supervisor in Albemarle, I went to a meeting where Bob Dennis was expounding on the benefits of conservation easements. At the time I thought Bob was wrong that easements were the best way to save land. I was convinced that only zoning could protect rural land.
Well, Bob was right and I was wrong. While zoning can be comprehensive, it is limited legally and politically and is always subject to change. Conservation easements, because they are purely voluntary and permanent, surmount most of the shortcomings of zoning. However, the strength of conservation easements — that they are voluntary — is also a shortcoming. People have to decide to do them.
Virginia’s Land Preservation Tax Credit is the most compelling incentive for voluntary land conservation in America today. While it has substantial bipartisan support in the General Assembly, nothing is sacred, and the benefits under the program have been reduced and the rules tightened over the years. Which leads me to close as I began: If you own more than 100 acres in Rappahannock County and don’t plan to develop, now is the time for a conservation easement. The financial benefits of land conservation will never be better.
Lawyer and author Tim Lindstrom represents land trusts and landowners in conservation transactions in Wyoming, Idaho, Michigan and Virginia, and has written and lectured extensively on planning law and conservation-easement-related tax law, including authoring the 2008 “A Tax Guide to Conservation Easements” (Island Press; available on amazon.com). Tim and his family have contributed conservation easements on farms in Michigan and in Virginia, and reside in Rappahannock County. His office is in Washington.