Conservation Easement Tax Credit: 2014 Changes

In the United States, the most traditional tool for conserving private land, a conservation easement (also known as a conservation restriction), is a legal agreement between a landowner and a land trust or government agency that permanently limits uses of the land in order to protect its conservation values. The purposes of the easement will vary depending on the character of the particular property, the goals of the land trust or government unit, and the needs of the landowners. Some purposes for a conservation easement include maintaining water quality, improving wildlife habitat, fostering forest growth, sustainable agriculture and/or protecting scenic landscapes.

Landowners who donate a qualifying conservation easement to a qualified land protection organization may be eligible for a federal income tax deduction equal to the value of their donation. The value of the easement donation, as determined after an appraisal of the land is completed, equals the difference between the fair market value of the property before and after the easement takes effect.

This year, Colorado passed a bill that establishes an improved application and review process for conservation easement donations made on or after January 1, 2014. Because Colorado’s former process had numerous abuses surrounding individuals claiming the tax credit for unacceptable purposes, this new process was put in motion. The Division of Real Estate is now responsible to review each credit application to determine the credibility of the appraisal while the Conservation Easement Oversight Commission (CEOC) is tasked to determine whether the donation is a qualified contribution. Either organization may deny an application that fails to meet the requirements falling under their rules.

The goal of the new procedures is to move the review to the beginning of the process. That way, if the Division of Real Estate finds issues with the contribution, the taxpayer will have an opportunity to resolve shortcomings prior to seeking a tax credit. The new streamlined application and review process are a direct result of a performance audit. The assessment found that the Department of Revenue’s review process did not ensure that the easement would be used explicitly for conservation purposes.

The new legislation replaces the credit program, streamlining the process by getting the program into the hands of the agency with the appropriate level of expertise. The Department of Revenue gives the final say on tax-related aspects of the program and the Division of Real Estate gives the final say for the transactions, which are essentially real estate transactions.

Starting in 2014, all new credits can be carried forward. Accountants will no longer need to predict a client’s tax liability a year in advance and buyers won’t need to worry about wasting their money having to waive credits if they couldn’t use them all. This means that it will be easier than ever to buy credits early in the year when they are being sold at lower rates.

Although there is increased ease in the process, there are still risks that buyers and their consultants should be aware of. The Department of Revenue still has jurisdiction over tax forms, which seem to be the trigger of the majority of recent audits. It is still very important to keep a close eye on all the due diligence involved in a donation and tax credit transaction.

For more information, please contact BiggsKofford at 719-579-9090.