Colorado offers a conservation easement tax credit program that could save you money while at the same time help preserve Colorado’s natural treasures. Landowners who permanently preserve part of their land for agriculture, scenic views or wildlife habitat can generate Colorado income tax credits that can then be sold to taxpayers.
Purchasing these tax credits could be an excellent strategy if you have a Colorado income tax liability of at least $10,000. The tax credit is not a tax deduction, but rather is a dollar-for-dollar reduction of state tax liability.
Background on conservation easements in Colorado
Landowners who desire to conserve the special qualities of their land — for example, its productive farm soils, scenic beauty or valuable wildlife habitat – can choose to place a conservation easement on all or a portion of it. Conservation easements give people the assurance that the places they love will be protected forever. A conservation easement is a legal agreement that runs with the land, in perpetuity. Conservation easements may or may not allow public access to the protected property. Over two percent of the land in Colorado is protected by conservation easements, including land in every county.
Colorado requires a conservation easement holder (typically a land trust) to have the responsibility of stewardship for the land. Landowners retain full ownership of the land. Once the easement is in place, the landowner receives Colorado conservation easement tax credits which can be used against their Colorado tax liability or sold to a third party.
Who can purchase conservation easement tax credits?
Individuals and entities with Colorado state income tax liability may purchase tax credits. There is no limit to the amount of tax credits that any individual or entity may purchase.
The cost and benefit of purchasing a conservation easement tax credit
The major benefit of purchasing conservation easement tax credits is that they can be purchased at a discount, often at a savings of 10-14%. For example, if you have a $100,000 state income tax liability, you can purchase $100,000 worth of tax credits for between $86,000-90,000, thereby saving $10,000-14,000.
Here is an example to illustrate how purchasing conservation easement tax credits could benefit you:
- The Sellers place a conservation easement on part of their land which generates Colorado conservation easement tax credits.
- They want to sell their tax credits, so they work with a broker to find a buyer.
- The Buyers have a Colorado tax liability of $100,000. They want to offset their tax liability by purchasing tax credits so they contact a conservation easement tax credit broker.
- The Buyers purchase $100,000 worth of credits through the broker for the discounted rate of 87%, or $87,000.
- The Buyers can use the $100,000 of purchased credits against their $100,000 Colorado tax liability, reducing their liability to $0.
- Thus, instead of paying $100,000 in taxes, they paid $87,000 in conservation easement tax credits which both saved them $13,000 and also helped preserve some of Colorado’s land – a win-win!
The process
First, it’s good idea to have an idea of what your Colorado tax liability will be for the upcoming year. Your tax advisor can assist you in this.
Secondly, although not a requirement, it is advisable to purchase tax credits through a reputable broker. Brokers know this process intimately and can efficiently guide a buyer through each step. There are some risks involved when purchasing conservation easement tax credits; these can be greatly minimized by using a reputable broker.
A tax credit broker will match you up with a conservation easement seller and will verify the validity of the credits. The broker also prepares the documents to transfer the credits from the seller to the buyer.
Next steps
In addition to conservation tax credits, Colorado also offers environmental remediation (Brownfield) tax credits and historic preservation tax credits. If you think you have a Colorado tax liability of at least $10,000 and would like more information on tax credits, please contact our office to discuss the details of your specific situation. Tax credits are in high demand and as a result some brokers have waiting lists already forming, so do not hesitate for long.
