As ranch brokers assisting buyers and sellers of Colorado ranches for sale, we are commonly asked to explain the basics of Colorado’s conservation tax credit program. For conservation-minded investors and landowners, Colorado’s tax credit system can provide a practical method for protecting open space, working ranches, and/or ecologically significant areas, while also creating a financial benefit. What follows is a very brief and high level overview of the program:
In the state of Colorado, the donation of a conservation easement to a certified land trust or government agency creates federal tax deductions, as well as state tax credits. Colorado is unique in that our state laws allow the landowner (donor of the easement) to either use the tax credit for him/herself or sell the credit to a third party.
This ability to sell the tax credit can create a win-win financial incentive for both landowners and investors. Landowners are able to conserve their land, retain ownership, and earn cash for their conservation efforts, while investors with large tax liabilities are able to purchase the credits at a discount, effectively reducing their tax expense.
Tax Credit Valuation
A certified appraiser determines the easement’s value, which is roughly calculated as: [Land Value Before Conservation Easement – Land Value After Conservation Easement] = Easement Value. In Colorado, the value of the tax credit is 50% of the value of the donated easement, up to a maximum tax credit value of $375,000. Examples:
- For an easement valued at $100,000, the donor will receive a $50,000 tax credit (50% of $100,000 = $50,000)
- For an easement valued at $750,000, the donor will receive a $375,000 tax credit (50% of $750,000 = $375,000)
- For an easement valued at $1,000,000, the donor will receive a $375,000 tax credit (50% of $1,000,000 exceeds the maximum limit, so the credit is $375,000)
In order for the tax credit to be issued, the conservation easement must be held by a certified land trust, as defined by the state of Colorado. Conservation tax credits can be only used once, but unused portions of the credit may be sold or carried forward for up to 20 years.
Buying and Selling Credits
If you are a Colorado taxpayer, purchasing conservation tax credits allows you to reduce your income tax expense, while simultaneously encouraging land conservation throughout the state of Colorado.
There are many landowners who have placed a conservation easement and either have no need for a tax credit (their tax liability is too small) or would simply prefer to have cash. Because Colorado state law allows the conservation tax credits to be transferred one time, individuals or businesses with tax liabilities can purchase these credits from landowners who do not need or want them.
The credits are generally sold at a discount of around 85 cents on the dollar; however the buyer of the credit can utilize the full credit amount.
Example: John buys a $100,000 conservation tax credit from a landowner, who has no need for such a large tax credit. John pays the landowner a discounted rate of $85,000 but is able to utilize the full $100,000 to offset his tax liability. John has effectively reduced his tax expense by $15,000.
Like any tax matter, the Colorado conservation tax credit system can be enormously complex, so it is important to consult with an experienced attorney, accountant, or tax credit broker to assist you with the details of the process. Mirr Ranch Group has extensive experience guiding landowners through the entire conservation process, so contact us if we can be of assistance.
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